This Weekend's G-20 Meeting Won't Bring Any Answers on Financial Regulation

Finance ministers from the Group of 20  (G-20) nations this weekend will attempt to reach a compromise on the implementation of stricter banking regulations at a meeting in Busan, South Korea. However, significant changes to financial regulation will come slow, if at all.

The meeting will start late Friday and will involve discussions about how to reduce deficits and prepare financial institutions for a wider set of rules.

"Sustaining world economic growth is the most important item on the G-20 agenda this weekend," said U.K. Chancellor of the Exchequer George Osborne. "Countries with high budget deficits must show that they can deal with them. Equally, surplus countries, such as China, must show that they too can support economic growth going forward."

Osborne also urged fellow G-20 nations to use this weekend to decide on the timing and scale of banking requirements.

"We want to end the uncertainty," Osborne said.

The push for new banking regulations has divided finance leaders, who have varying points of view on the form new regulations should take. U.S. Treasury Secretary Timothy Geithner, along with other countries with economies that are largely financed by markets, want banks to raise Tier-1 capital to form a stronger buffer against a future financial crisis. But some Eurozone lawmakers don't want to put too much pressure on banks and risk killing economic growth. Their position has been exacerbated by the sovereign debt crisis, which has accelerated the tightening of fiscal consolidation.

"Anything that impacts banks will have a bigger effect in Europe than the U.S., where capital markets play a bigger role," Douglas Elliot, an analyst at the Brookings Institution in Washington and former managing director at JPMorgan Chase & Co. (NYSE: JPM), told Bloomberg. "There's quite high agreement that capital rules need to change, but difference on just how to do it."

New rules could put the banks under pressure to raise as much as $375 billion in capital. Geithner, along with Osborne, has proposed a transition period as a compromise to allow the banks more time and to ensure regulations don't get watered down if imposed sooner than planned.

"It is perfectly reasonable to use transition periods to make it easier for countries to adjust to what we believe should be a substantially more demanding, more ambitious set of constraints on leverage," said Geithner.

Some G-20 sources blame the lack of progress on France and Germany, which they say are trying to dilute capital requirements by including deferred tax assets and minority interests as Tier-1 capital.

Critics also allege that U.S. and European officials see the new banking regulations as a chance to gain a competitive edge over other countries, especially if the new enforced requirements build on pre-existing regulatory models.

The Basel Committee on Banking Supervision is set to release the rules by the end of 2010 and is striving to create proposals that "will result in more resilient banks and a sounder banking and financial system," then-chairman Nout Wellink said last fall.

The G-20 finance leaders aim to implement the new rules by the end of 2012, depending on the progress of the global economy. Sources close to the discussions have said the regulation enforcement could be put off as late as 2014 or 2016.

Besides capital requirements the G-20 nations also need to decide on the proposal to impose a levy on banks, but some finance ministers have said they are considering other methods than taxation.

"I don't think we're on the verge of a global consensus on bank levy yet," said Geithner. "I don't think that's going to change in Korea."

In response to looming changes in regulation, banks are planning a lobbying effort for less stringent rules.

"It is unrealistic to expect such significant capital raising to occur without a significant impact on lending, businesses and ultimately growth and employment," Andrew Procter, Deutsche Bank's global head of government and regulatory affairs, wrote to the Basel Committee on April 16.

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