Leaders of the world's biggest developed and emerging nations have told banks and investors that they will need to keep more capital and reveal more about their holdings, signaling the industry may emerge from the current crisis with less potential for profit.
Outgoing US President, George Walker Bush and his counterparts from the Group of 20 blamed a looming global recession on imprudent investors who “sought higher yields without an adequate appreciation of the risks”.
Supervisors who failed to address the dangers building in markets were also at fault, the group said in its statement after meeting over the weekend in Washington, USA.
The leaders are seeking to correct those failures with their new demands, particularly higher capital standards and stronger risk management at banks, hedge funds and credit-rating firms.
Writedowns and losses totaling $964.6 billion at financial institutions worldwide have triggered a surge in the cost of credit, cutting off access to capital for consumers and companies.
Chief among the changes sought by the G-20 are ways to increase international surveillance of the financial firms whose operations, and problems, cross national borders.
The G-20 also indicated openness to so-called dynamic capital rules, which would oblige lenders to accumulate excess cash during periods of high profit as an added cushion for times when losses increase.
Finance ministers were tasked with making recommendations for “mitigating against pro-cyclicality in regulatory policy”.
A report by the Bank of England last month showed capital ratios at U.S. commercial banks have plunged to less than 10 percent of assets from over half in the mid-19th century.
The G-20 also urged a “broader policy response” to slumping growth, citing the potential, if not a promise, for more interest-rate cuts and fiscal stimulus. They pledged not to erect protectionist barriers for 12 months and to devise by year-end a way to conclude the Doha Round of Trade Talks.
In another move to calm volatility, the G-20 endorsed central clearinghouses for financial derivatives to back trades and absorb losses in case of a dealer failure. That would likely slow the market's growth.
The G-20 finance ministers were given until March 31 to come up with plans to implement the proposals. The leaders convene again in April, most likely in London.
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. The Netherlands and Spain were also represented.
Meanwhile, Japan's economy, the second largest in the world, has entered its first recession in seven years as the global financial crisis batters exports and business investment, official data showed yesterday.
Japan joins Germany and Italy on the list of major economies that are officially in recession, despite emergency steps by world powers to try to shield the global economy from months of turmoil on financial markets.
The Japanese economy unexpectedly contracted by 0.1 percent in the three months to September, after shrinking 0.9 percent in the second quarter of the year, according to figures from the Cabinet Office.
From Business Desk