G-20 moves forward on regulatory framework

The new era of finance is now dawning in earnest. Word from the G-20 meetings in London is that world leaders have agreed on a regulatory framework for countering excesses that led to the current global financial crisis. In particular, the group called for stricter limits on hedge funds, executive pay, credit-rating agencies and bank risk-taking. In addition, they pledged more than $1T in emergency aid to assist with collateral damage from the crisis. While countries will mainly be left to regulate their own markets and companies, the G-20 recognized a need for some global oversight by establishing a new Financial Stability Board to promote regulator cooperation and work with the IMF. Hedge funds defined as "systemically important" will be subjected to greater regulation and oversight. Pay and bonuses will be examined to create "sustainable compensation schemes". Accountants will need to improve valuation methods and creit rating agencies will need to meet a new code of standards.

Meanwhile, focusing back on the US, KC Fed President Thomas Hoenig endorsed the notion of the Federal Reserve becoming the regulator for systemic risk in US finance. In Geithner's recent proposal, such a systemic-risk regulator would have the authority to compel companies to boost their capital and curtail borrowing, as well as to seize companies get into trouble.

The Financial Stability Forum agreed to move towards creating stricter capital requirements for banks around the world, reversing their prior view of giving financial institutions more flexibilty in how they calculate reserves.

Ron Resnick, co-founder of financial consulting firm CounselWorks has an interesting piece on his views about government assumptions in the regulation of financial firms. He questions Treasury's new supervisory and regulatory foundation based upon the concept of "systemically important firms".