G7 under pressure to keep regulation on track

The G20 group of leading nations, rapidly replacing the G7 as the main forum for global governance, agreed at a meeting Obama hosted in September to focus on strengthening bank capital rules.

The US leader stunned global markets and policymakers in January when he unilaterally proposed curbing the size and trading activities of banks to lessen the need for more massive taxpayer handouts in future crises.

The plan, which has cross-border implications, has raised concerns that a global deal on regulation is being hijacked by populist national interests.

"The G20 faces a real challenge in getting a global deal that includes America. The Obama plan was a bit of a bolt from the blue," said Stuart Fraser, policy chairman at the City of London which promotes the capital's financial services industry.

"It is regrettable that domestic political considerations appear to have been given precedence over the developing global consensus," Fraser said, referring to Obama's reaction to his Democratic Party's shock defeat in a Senate election in Massachussets.

EU finance ministers are also under pressure to respond. They were due to discuss the issue in April but the Netherlands, which backs the plan, wants a debate when ministers next meet on February 16.

Banks may exploit loopholes
The fear in Europe is that the US plan - even though there is no guarantee a fractious Congress will adopt it - will encourage other countries to promote their own national interests, creating potential loopholes for banks to exploit.

"If we don't come up over the next 12 to 18 months with convergent types of approaches, then emmenthal cheese will be the likely outcome," said David Wright, deputy head of internal markets at the EU's executive European Commission.

Britain alarmed some countries by unilaterally introducing a new liquidity regime for domestic and foreign banks before a global deal had been reached.

It is also piloting "living wills" at a handful of banks as an alternative way of protecting the public purse in future financial crises.

British Financial Services Minister Paul Myners said that increasing capital charges on banks and imposing living wills was the best way to proceed.

The opposition Conservatives, tipped by polls to win the next election due by June, also backs unilateral regulatory action where needed.

"It is important where possible to reach international agreement on regulatory reform, but it might be the case that we have to act in advance of international agreeements where it is right to do so, particularly given the size of the financial services sector in the UK," said Mark Hoban, the party's financial services spokesman.

Other cracks
Obama's plan is not the only chink emerging in the G20 blueprint. Britain and France also slapped a windfall tax on bonuses, a step other G20 countries have yet to copy.

The Basel Committee of central bankers and supervisors is set to finalise a sweeping reform of its global Basel II accord on bank capital at the behest of the G20.

But France and Germany are quietly lobbying the EU not to turn into law Basel's planned percentage cap on bank leverage, a bank official familiar with the lobbying said.

In accounting, the G20 set a mid-2011 deadline for agreeing one global set of rules to increase transparency for investors, but the EU and the US are dragging their feet because of domestic interests.

"The politicisation of accounting standard setters is derailing the move to convergence," said Peter Chidgey, head of financial services at global accounting firm BDO.

There are differences over cutting risk in derivatives, with the US wanting contracts traded on exchanges as much as possible while Britain is against mandatory change.

Some divergence may not matter as long as the outcomes are similar and no country or region ends up with an unfair advantage in attracting business, some commentators say, while some banks see differences as helping to slow down rulemaking.

"We have to get international cooperation onto an even keel and delivering results. Only by working together will we avoid regulatory arbitrage that could well sow the seeds for another potential crisis further down the line," Fraser said.

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