Summit opens door to wide reforms

German chancellor Angela Merkel and US president George W. Bush at the summit

The Group of 20 summit opened the door to what could be extensive reform of global financial regulation in a relatively tight timeframe – but only if the new US administration is willing to play ball.

Priority areas include efforts to strengthen the credit derivatives market, review financial sector pay schemes, create colleges of national supervisors to monitor global banks and improve guidance for valuation of illiquid securities.

The list also spans reforms that would make the regulatory system less pro-cyclical, new requirements for enhanced disclosure of ­complex financial instruments, and a commitment to review best practice codes being developed by the hedge fund and private equity industries.

In principle all of these issues should be resolved by March 31, with a still more ambitious agenda to follow. However, the outcome of this process will depend on the extent to which the Obama administration – which takes office on January 20 – is willing to make big decisions on regulatory reform in its first few months in office.

Many US experts – not just within the Bush administration – think it would make more sense to focus on overcoming the crisis first, then embark on a far-reaching programme of reform. Tim Ryan, president of the Securities Industry and Financial Markets Association, said many of the issues raised in the action plan “were issues already being studied in various working groups and international bodies”.

What is different now is that world leaders have taken this work, opened it up to the top emerging economies and enshrined it in a detailed action plan with a timeline for delivering results.

On some issues there do not appear to be any big ­differences. All G20 nations embrace the idea of the college of supervisors, although this has proven tricky to implement at the European level.

All, meanwhile, are anxious to rapidly shore up the infrastructure of the market for credit default swaps, a form of market insurance that pays off in the event of a default on a debt.

In some areas, such as accounting treatment of illiquid assets, there are difficulties, though these are not necessarily ideological. Some nations are keener than others to water down mark-to-market accounting principles which they see as amplifying the economic downturn.

European officials were delighted, however, that the US agreed to open up debate on financial sector pay, supervision of hedge funds and the treatment of tax havens.

But the US side ruled out dictating to the private sector what types of pay schemes were acceptable, and talked instead of “universal encouragement for firms to address this issue.”

The US and Europe remain far apart on their approach to hedge funds. Germany and France succeeded in establishing the principle that all financial institutions need to be subject to appropriate regulation or oversight.

But US officials emphasise the word “appropriate”. They believe that the ­indirect supervision of hedge funds via their prime broker banks has worked reasonably well during the crisis.