Leaders at the Group of 20 (G20) top world economies meeting in Seoul this week will review their progress on pledges to tighten banking and market rules after the worst financial crisis since the Great Depression.
The leaders will review progress they have made on the following regulatory issues:
The G20 wants banks to hold more and better quality capital to withstand shocks without taxpayer help again.
The Basel Committee of global central bankers and regulators approved a "Basel III" package in September to toughen up global capital and liquidity requirements for banks from 2013 with full effect by 2019. It forms the cornerstone of the G20's reforms to apply lessons from the financial crisis.
The package is expected to be approved in its current form by the G20 summit and hailed as a major advance in financial stability.
TOO BIG TO FAIL
The Financial Stability Board (FSB), tasked by the G20 with implementing its regulatory pledges, will present recommendations on "systemically important financial institutions" or SIFIs -- a reference to the world's 30 or so biggest banks whose failure could destabilise the broader financial system.
These pledges will make it mandatory for regulators to make sure there is a resolution regime for any big globally-interconnected lenders in their country and that each of them must have a living will, or plan showing how a bank would be wound up without causing broader disruption to markets.
There will also be guidelines on ensuring such financial institutions are subject to an increased "intensity" of supervision.
There is also broad agreement that these lenders should hold extra "loss absorption" capacity with national authorities setting some or a combination of the following requirements:
-- capital surcharge: force big banks to hold a capital buffer on top of Basel III. Switzerland has already pushed ahead with topping up on Basel III, but Japan, Germany and France oppose surcharges on their big banks.
-- contingent capital or "CoCos," a bond that converts into equity when an agreed trigger point is hit. Switzerland has approved CoCos for topping up capital of its two big banks, but some regulators question the market's appetite for such debt and its reliability in times of crisis.
-- bail-in debt: a bank's creditors agree in advance to have a restructuring imposed on them if the firm starts becoming insolvent or its capital levels go below required levels.
The G20 is only expected to agree broad principles on SIFIs this week due to disputes over many details, such as the need for surcharges, who is in charge of pulling the trigger on CoCos and bail-ins.
The FSB has said it has not yet finalised which banks will be classed as "global SIFIs" and is unlikely to do this until midway through 2011.
It's expected G20 countries will end up having a choice of options to apply to any such banks under their control.
The summit is expected to endorse a series of deadlines set by the Financial Stability Board for G20 countries to tighten supervision and ensure that as many contracts as possible in the $615 trillion derivatives market are standardised so they can be centrally cleared and traded on exchanges.
It will also recommend that all over-the-counter derivative trades be reported to central depositories.
The United States has already adopted a law to this effect with the European Union on the same track.
Next step: G20 securities regulators to report in January on which derivatives contracts should be standardised and traded on a regulated platform.
CREDIT RATING AGENCIES
The FSB has proposed ways to reduce the "mechanical reliance on ratings." It recommended that references to credit rating agencies in rules and regulations be removed or replaced wherever possible with suitable alternative standards of creditworthiness assessment.
This is aimed at reducing the so-called cliff effects caused by changes to credit ratings, which regulators have blamed for causing market instability.
The G20 is set to endorse these FSB principles.
The United States is already working on removing references to ratings in financial rules and the EU has just launched a public consultation on this.
A G20 deadline of June 2011 for reaching a single set of global accounting standards will not be met in full as differences have emerged between the United States and others. The summit may put pressure on standard setters to redouble their efforts to forge common rules by the end of 2011.
The G20 has already asked regulators to study transparency and volatility in commodity markets, such as oil, and consider ways to quell what some countries, such as France, see as speculation pushing up food prices.
Regulators reported this week that transparency in oil markets has improved and signalled no need for any radical overhaul though they said physical commodity markets need to provide more pricing information.
France takes over as G20 host and is expected to push for new global rules to crack down on commodity markets but some regulators say there is no big appetite and that transparency is already improving markedly.
The FSB's big task for next year is to devise ways to improve oversight of the "shadow banking" system. The fear is that as banks face tighter scrutiny, credit activity will move to less regulated areas.
Supervisors want to have powers to extend the "perimeter" of regulation quickly if they spot new risky activities.
(Reporting by Huw Jones and Rachel Armstrong; Editing by Alex Richardson)