TAX NEWS - JUNE 2010

G-20 Is Nearing Accord on New Capital Rules

BUSAN, South Korea — The world's leading economic powers edged toward agreement on new rules to ensure that major banks keep enough money in reserve to insulate them against future crises.

Separately, European governments, under pressure to show progress in implementing their planned bailout for the continent's struggling governments, are close to agreement among themselves on the specifics. They could announce a formal accord as early as Monday, officials here said.

Top finance officials from the Group of 20 major industrial and developing economies agreed Saturday they would finish work on the tightened banking standards before their leaders meet for a summit in Seoul in November, ahead of their original year-end goal.

"It is critical that our banking regulators develop capital and liquidity rules of sufficient rigor to allow our financial firms to withstand future downturns in the global financial system," the finance ministers and central bankers said in a communique released at the end of the two-day meeting on the Korean coast.

Amid these signs of progress, the G-20 remained at odds over another central policy goal: imposing a global levy on financial institutions, either to recoup public expenditures on bailouts or to raise money that might be used to address the next crisis.

The global financial crisis that began in 2008 focused international attention on the technical question of how much, and what kind, of capital banks should have on hand to protect against shocks. American banks reeled when securities backed by failing home mortgages turned sour, leading to giant government bailouts. Likewise, European banks now appear shaky because of their holdings of government bonds from Greece and other financially unstable countries.

Just a few months ago, talks dubbed Basel III, after the Swiss town where they take place, appeared in danger, with countries bickering over, among other issues, whether certain types of securities counted as a viable capital cushion.

U.S. officials said top-level talks this weekend gave more impetus than they had expected to the ground-level negotiations. Technical experts in the Basel Committee on Banking Supervision have the job of turning the general agreement into specific guidelines.

"Stronger capital and liquidity requirements and constraints on leverage are necessary to help ensure that global active financial institutions are better able to withstand future financial shocks and economic shocks," U.S. Treasury Secretary Timothy Geithner told reporters as the meetings wrapped up.

The G-20 vowed to aim to implement the new rules by the end of 2012, but there has been discussion recently of pushing back that target for countries nervous about exposing weakness in their banks.

In fact, while they plan to announce a broad agreement at the November summit, G-20 members are still pondering how and when to reveal the specifics of what will constitute acceptable types and levels of capital. Some governments fear that announcing capital goals while their banks remain wobbly might make it harder for them to regain their footing.

European officials arrived in South Korea under pressure from some of their counterparts and from financial markets to explain just how they would use their new €440 billion ($530 billion) loan entity, part of a $900 billion rescue effort for troubled European Union member states.

Mr. Geithner welcomed signs of agreement among the states. "That will be helpful," he told reporters. "I think people want to see what the details are."

On the G-20 agenda was the related matter of how to solve Europe's dilemma of needing to cut government borrowing at the same time that economies there are reliant on state spending for growth and employment. Spending cuts on pensions and public sector jobs could assuage financial markets in the near term, but could also cause growth to slow, compounding countries' abilities to pay down debt.

"The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability," said a communiqué delivered by the countries at the meeting's end.

IMF Managing Director Dominique Strauss-Kahn acknowledged the shift in emphasis. "The right policy two years ago was to put in place the fiscal stimulus," he said. "The right fiscal policy today is a bit more complicated because it depends on the country."

He warned that cuts in government spending in the developed economies will have "very negative effects" on emerging economies that rely on exports for growth. The "emerging market countries have to take actions to advance their own growth to compensate for this," he said, referring to plans by countries such as China to reduce savings and boost domestic consumption.

The summit showed how the G-20 remained at odds over proposals to impose a global levy on financial institutions.

The International Monetary Fund presented the G-20 with a report outlining two possible taxes: An insurance-type fund that would raise money in advance of a crisis, and another that would tax bank profits and executive salaries after a crisis. The EU and the U.K. generally favor some sort of bank levy, while the Obama administration supports a tax that would raise $90 billion over 10 years.

The G-20 signed off on language arguing that the "financial sector should make a fair and substantial contribution towards paying for any burdens associated with government interventions, where they occur, to repair the banking system or fund resolution."

But the general wording masked tensions among G-20 members. Canada, whose prudently run banks largely dodged the credit collapse, argued its lenders shouldn't be penalized for the failings of others. "There is no agreement to proceed with an ex-ante bank tax," said Canadian Finance Minister Jim Flaherty.

Mr. Strauss-Kahn challenged the Canadian view, telling reporters that such countries are acting "as if they are immune forever" from bank crises, which "in my view is a bit optimistic."

He predicted that the U.S. and Europe would proceed with their own plans for bank taxes, leaving others to follow if they so choose.