London - Global finance chiefs at the weekend united on a plan to rein in bank bonuses and force lenders to hold more capital to prevent a repeat of the worst financial turmoil since the Great Depression.
Finance ministers and central bankers from the Group of 20 (G20) nations concluded talks in London on Saturday proposing the clawback of cash awards and tying compensation to long-term performance. Banks will also have to raise the amount and quality of the assets they keep in reserve and curb leverage.
As the G20 pledged to sustain efforts to nurture a nascent economic recovery, officials from the US and euro zone narrowed differences that threatened to derail their effort to forge a new regulatory order. The compromise marked a fresh bid to appease public anger after taxpayer-funded bailouts of banks including Citigroup and Royal Bank of Scotland.
"We have broad agreement on a strong set of principles and objectives for building a more stable global financial system," said US Treasury Secretary Timothy Geithner. "We need to move to put that framework in place."
Geithner, UK Chancellor of the Exchequer Alistair Darling, European Central Bank president Jean-Claude Trichet and their counterparts met to set the stage for agreement at a two-day summit of G20 leaders in Pittsburgh from September 24.
Their joint statement built on G20 efforts born in the wake of the crash of the US housing market and 2008 collapse of Lehman Brothers that have caused $1.6 trillion (R12.2 trillion) in losses and write-downs at banks and a deep global recession.
French and German officials wanted to focus on banker pay, while Geithner sought to use the talks as a springboard for a new framework to contain the financial industry.
"Our objective is to reach agreement by the end of next year on a new standard that will raise capital and liquidity requirements and dampen rather than amplify future credit and asset price bubbles," said Geithner.
Ministers from France and Germany claimed credit for what they called a successful push to contain bankers' pay. "Without Germany and France insisting, we would not have come this far," said German Finance Minister Peer Steinbrueck.
The G20 left it to the Financial Stability Board, a panel of international regulators, to add detail to the proposals in time for the leaders' summit.
The group was tasked with studying ways to limit bonus pools as well as the relationship of awards to overall compensation, risk and long-term success. Banks were directed to use more of their profits to boost capital and lending, and told to disclose more about how they rewarded top earners.
They were not pressed to cap individual awards as France proposed in the face of US and UK opposition.
Goldman Sachs set aside a record $11.4bn for compensation and benefits in the first half, up 33 percent year on year. Morgan Stanley allotted 72 percent of its second-quarter revenue.
In France, banks bowed last month to President Nicolas Sarkozy, deferring for three years two-thirds of bonuses and paying a third in shares.
The G20 would struggle to turn its principles into detailed and enforceable policies, said Shaun Springer, the chief executive of remuneration advisory firm Square Mile Services.
"The holes in their thinking are cavernous," he said.
Financial companies will also have to outline how they would unwind international units in times of crisis, what Darling called "living wills".
The riskiest financial activities should have the tightest capital standards, Geithner said. The US agreed to implement Basel II capital rules, acknowledging French criticism that President Barack Obama's administration was beginning a new reform drive without enacting existing capital standards.
The G20 planned to work out before the Pittsburgh summit how to hand more power at the International Monetary Fund to emerging markets. The lender had raised $500 billion in new funding after aiding countries from Hungary to Pakistan, managing director Dominique Strauss-Kahn said. - Bloomberg