G-20 Finance Chiefs Call for Lower Bonuses, Higher Bank Capital

By Gonzalo Vina and Simon Kennedy

Sept. 6 (Bloomberg) -- Global finance chiefs 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 nations concluded talks in London yesterday 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 G-20 pledged to sustain efforts to nurture a nascent economic recovery, officials from the U.S. and euro area 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 Inc. and Royal Bank of Scotland Group Plc.

“We have broad agreement on a very strong set of principles and objectives for building a more stable global financial system,” U.S. Treasury Secretary Timothy Geithner said after the meeting. “We need to move now to put that framework in place.”

Geithner, U.K. 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 summit of G-20 leaders in Pittsburgh on Sept. 24-25.

Split Narrowed

Their joint statement built on G-20 efforts born in the wake of the crash of the U.S. housing market and 2008 collapse of Lehman Brothers Holdings Ltd. that have caused $1.6 trillion in losses and writedowns at banks and the deepest global recession since World War II.

French and German officials wanted to focus on banker pay at the meeting, 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,” Geithner said.

Ministers from France and Germany, who spoke to reporters together after the meeting, claimed credit for what they called a successful push to contain bankers’ pay.

“Without Germany and France insisting, we wouldn’t have come this far,” said German Finance Minister Peer Steinbrueck.

Details Needed

The G-20 left it to the Financial Stability Board, a Basel- based panel of international regulators, to add detail to the proposals in time for the Sept. 24-25 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 reward top earners. They weren’t pressed to cap individual awards as France proposed in the face of U.S. and U.K. opposition.

Goldman Sachs Group Inc. set aside a record $11.4 billion for compensation and benefits in the first half of 2009, up 33 percent from a year earlier, while Morgan Stanley allotted 72 percent of its second-quarter revenue. In France, BNP Paribas SA and Societe Generale SA were among the banks that bowed last month to President Nicolas Sarkozy, deferring for three years two-thirds of bonuses and paying a third of them in shares. They also vowed to stop offering guaranteed payouts to new hires.

The G-20 will struggle to turn their principles into detailed and enforceable policies, said Shaun Springer, chief executive officer of Square Mile Services Ltd., a London-based remuneration-advisory firm. “The holes in their thinking are cavernous,” he said.

‘Living Wills’

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 U.S. 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 failure to crack down on banks has cost governments support among voters. Almost eight out of 10 Britons last month criticized as too weak new pay rules from the Financial Services Authority, a YouGov Plc survey showed Aug. 15.

“We’re not going to drop the ball,” said French Finance Minister Christine Lagarde. “Bonuses are quite outrageous.”

Earnings Concern

Setting aside more capital may hurt banks’ earnings. That concern pushed up the cost of protecting their bonds from default by the most in a month in Europe on Sept. 2. Credit- default swaps on the Markit iTraxx Financial index linked to 25 European banks and insurers jumped 5.5 basis points that day to 94 basis points, the biggest one-day increase since Aug. 8, according to JPMorgan Chase & Co. prices.

Expressing caution on the outlook for the world economy, the G-20 officials judged it premature to start unwinding record-low interest rates and more than $2 trillion in fiscal stimulus. At the same time, they agreed the eventual exit from emergency measures should be coordinated across borders to avoid distorting markets.

“While the global economy is stabilizing, the recovery isn’t established,” Canadian Finance Minister Jim Flaherty said. “We must stay the course.”

IMF Forecast

The policy makers were told by the International Monetary Fund that it had raised its forecast for global growth next year to 2.9 percent from July’s 2.5 percent estimate. The Washington- based lender cut its projection for contraction this year to 1.3 percent from 1.4 percent, according to an official from a G-20 government, citing a paper prepared for the meeting.

The U.S. Labor Department reported Sept. 4 that while the pace of job cuts slowed to its weakest in a year in August, unemployment reached a 26-year high. Peoria, Illinois-based Caterpillar Inc. reported profits exceeding analysts’ estimates in the second quarter, yet sales by the world’s largest maker of construction equipment dropped 41 percent from the same time a year ago and it’s chopped about 17,100 full-time jobs this year.

The mixture of recovery and refusal to rush to end crisis measures may continue to benefit both stocks and bonds. The MSCI World Index of stocks has gained 56 percent since reaching a 14- year low on March 9. The Merrill Lynch & Co. Global Sovereign Broad Market Plus Index shows government debt yields are the lowest since April.

The G-20 planned to work out before the Pittsburgh summit how to hand more power at the IMF to emerging markets. The lender has raised $500 billion in new funding after aiding countries from Hungary to Pakistan, Managing Director Dominique Strauss-Kahn said.

The G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.

To contact the reporter responsible for this story: Simon Kennedy in London at Skennedy4@bloomberg.net; Gonzalo Vina in London at gvina@bloomberg.net

Last Updated: September 5, 2009 19:01 EDT