Financial Reform Watch

Over the past months, the G20 has gone from being regarded as yet another over-sized talk shop with little clout to becoming one of the main vehicles for a global response to the crisis.

With stakeholders now hosting increasing and sometimes contradicting expectations, there is a risk that the summit will become a victim of its own success. However, even with an outcome that falls short of producing broad consensus on an all issues, significant progress will have been made if the result is the firm establishment of G20 as the primary, global forum to deal with the crisis.

The G20 preparations now involve the full range of international organizations, trade blocs and stakeholders. The British Government's Business and Enterprise Department and the Confederation of British Industry, the UK's largest business organization, co-hosted a special summit of business leaders from G20 countries—chaired by Lord Peter Mandelson, the Business Secretary—in London on March 18. Separately, the UK Financial Services Authority presented the long-awaited Turner Report with proposals that, if enacted, will introduce dramatic changes to the regulatory framework that governs the City.

The Turner Report will be closely scrutinized by the EU institutions in Brussels and could thus provide a hint of what to expect in terms of EU-wide regulation further down the road. Headline reforms proposed in the review include:

• Fundamental changes to bank capital and liquidity regulations
• More and higher quality bank capital, with several times as much capital required to support risky trading activity
• The introduction of counter-cyclical capital buffers
• Much tighter regulation of liquidity
• Regulation of "shadow banking" activities of institutions such as hedge fund
• Regulation of credit rating agencies to limit conflicts of interest and inappropriate application of rating techniques
• Action to ensure that remuneration policies discourage excessive risk-taking
• Major reforms in the regulation of the European banking market, combining a new European regulatory authority and increased national powers to constrain risky cross-border activity.

The Obama Administration continues to place more emphasis on economic stimulus than financial regulatory reform. Also, with inflammatory issues, such as bailout recipient AIG paying out hearty bonuses, diverting attention it is taking longer than expected to staff the U.S. Treasury Department and focus on the regulatory agenda.

The Congress continues to hold hearings and gather expert testimony on financial regulatory reform. On Tuesday, March 16, the House Financial Services Committee heard from industry on the subject of a systemic risk regulator. While there seems to be agreement on the concept, there is still much debate over what agency or group of agencies could perform such a broad function. Treasury Secretary Tim Geithner is scheduled to testify on "Addressing the Need for Comprehensive Regulatory Reform" before the same committee on 26 March, which may be the first window into the Obama Administration's regulatory proposals for the G20.