G20 finance ministers to pursue bank reforms

By Andrew Walker
Economics correspondent, BBC World Service

The G20 meeting has drawn its usual gathering of protesters

G20 Finance Ministers are meeting in St Andrews in Scotland to pursue an agenda of financial reform and economic recovery.

The meeting follows a summit in Pittsburgh in September, where G20 leaders breathed a sigh of relief.

The global economy had been badly damaged by the financial storms, but not demolished.

Now, in St Andrews the finance minsters are getting stuck into the task of rebuilding with, they hope, more solid foundations to withstand future turmoil.

They put the success in stepping back from the abyss down to their own policies- the bank rescues, and the stimulus from a raft of government and central bank actions, including public spending, tax cuts, low interest rates and some other unconventional policies, such as boosting the amount of money in circulation.

Exit strategies

But they are policies that none of them wants to maintain indefinitely.

There seems to be a consensus that it is still too soon to put these measures into reverse, that to do so would endanger the rather fragile signs of recovery taking shape.

But they will be talking about exit strategies.

The dangers if they do not prepare to unwind include inflation and a banking system dependent on the state.

They also have ringing in their ears a warning from the International Monetary Fund (IMF) about a grim outlook for government finances.

Government debt in the developed G20 countries is likely to reach 118% of annual national income (GDP) in 2014.

It will take years of spending cuts and higher taxes to get debts down to what the IMF calls safe levels.

Bonus curbs

The headline grabbing discussions about bank bonuses have not gone away, despite an agreement at the Pittsburgh Summit on new rules.

France was at the forefront of pushing bonus reform

Those rules did not cap the amount that can be paid, but they are intended to ensure that bonuses do not encourage excessive risk taking.

The deal includes requiring bonuses to be paid over several years and some degree of claw back if a firm's performance deteriorates.

France was among the most enthusiastic for bonus curbs so its no surprise that the country claims to be the first to implement the Pittsburgh agreement.

They did it with new rules announced by the Finance Minister Christine Lagarde on Thursday.

The timing, immediately before the St Andrews meeting, is no coincidence, according to French officials.

They are keen that the rest of the G20 should get on with implementation quickly.

Otherwise French banks could be at a disadvantage in retaining or recruiting traders and senior executives.

Fixing the banks

Beyond bonuses there is a long agenda of financial regulation that the G20 are committed to tackling.

Eventually banks will have to hold more capital - mainly money from shareholders - to protect themselves against losses.

And there are some difficult issues about what to do with financial institutions that are considered too big to be allowed to fail - because their failure would do unacceptable wider financial and economic damage.

Do you force them to slim down, do you make them separate routine banking from more risky financial market trading, or do you just require them to have extra thick capital cushions to break their fall if they do get into trouble?

Bubble fears

Some developing country finance ministers are coming to St Andrews with a problem you might think they would be glad to have.

Too much investment flowing in from abroad, as some degree of confidence returns to international financial markets.

But they are wary.

These financial flows tend to push up emerging market currencies, which makes their export industries less competitive.

And there are concerns that it might conceivably be another financial bubble beginning to inflate.

That warning has come from Nouriel Roubini, the New York University professor who was the leading prophet of doom in the current financial crisis.

Brazil has already put a new tax on investment inflows - in financial markets, not on investment in new factories.

And the Finance Minsters Guido Mantega is expected air these concerns in St Andrews.

Time for golf?

Mr Roubini has warned another financial bubble may be on the way

And there is more.

China will likely come under pressure once again to allow its currency to rise.

They will talk about trying to curb the imbalances that contributed to the crisis - such as high levels of saving in China and low levels in the US.

There will also be discussion of reform of the IMF, where work is underway to give emerging economies more of a say in how it is run.

And climate change is on the agenda - particularly issues of funding to help developing countries to deal with the problem.

Perhaps some of the ministers might find the time for a round on St Andrews' famous golf course.

There is every chance that some of the issues they discuss will be stuck in the rough grass for a while yet.