ONE WORLD GOVERNMENT AGENCY G20 AIMS TO STRENGTHEN WORLD BANKERS AT EXPENSE OF NATIONAL BANKERS

G20: tougher time ahead for bankers

Eric Johnston
September 8, 2009 - 12:00AM

AUSTRALIAN bank executives face tougher rules on bonus payments while banks' capital reserves would come under greater scrutiny in measures proposed by the G20 group of nations.

The new rules aim to tackle some of the regulatory flaws exposed by last year's collapse in credit and financial markets.

Leading central bank governors said they had agreed on a package of measures to strengthen the regulation and supervision of the banking industry in the wake of the financial crisis.

However, the agreement comes as the local bank regulator is pre-empting any clampdown on bonus payments, yesterday releasing its response to a range of submissions to a review on remuneration for Australian bank executives.

At the heart of the Australian Prudential Regulation Authority's recommendations to the Rudd Government on tightening bonus payments are rules aimed at promoting incentive payments for behaviour that supports a bank's long-term financial soundness and risk management.

Any changes to executive remuneration could extend to foreign banks that operate in Australia.

Meanwhile, Australian banks are likely to resist calls from investors to return excess capital, until new global rules on capital are clarified.

G20 finance ministers and central bankers threw their support behind the need to strengthen capital reserves. Not only should banks hold more capital, but it should be of higher quality, G20 officials said over the weekend.

''Australian banks are part of the global financial system so they're going to be impacted by new regulations,'' one banking analyst said yesterday.

However, analysts noted APRA had previously talked down the need for widespread reform for Australian lenders, which largely avoided the excesses of the global financial crisis.

Under scrutiny are shortfalls in the Basel II rules on capital that fail to take into account certain risks associated with some assets, such as the complex credit instruments contained in the trading books, which have been blamed for the majority of losses for banks.

Other planned measures include so-called countercyclical capital buffers that will require banks to set aside funds to strengthen their reserves during good times and to protect them from potential losses when the economic cycle turns negative.

However, this could crimp profits, given that the need to hold greater levels of capital restricts lending. Australian banks are generally seen as holding higher levels of capital than their foreign counterparts, particularly after raising more than $16 billion in fresh funds over the past year.

Basel Committee chairman Nout Wellink said the new measures were aimed at resolving risks to the financial system. He said the planned measures ''will result over time in higher capital and liquidity requirements and less leverage in the banking system''.

This story was found at: http://business.theage.com.au/business/g20-tougher-time-ahead-for-bankers-20090907-fefa.html