Thank you to the good folks at the University of Toronto's G8 Research Group for posting the communiqué on their website.
Most media are writing about the end of the global bank levy based on the G20's failure to embrace the European push for a tax. Instead, the G20 recognized there are numerous ways to ensure the financial industry makes a "fair and substantial contribution" toward future bailouts.
Ministers said they agreed to develop "principles reflecting the need to protect taxpayers, reduce risks from the financial system, protect the flow of credit in good times and bad, taking into account individual countries' circumstances and options, and helping promote (a) level playing field."
Before the Canadian Bankers Association pops the champagne corks, it should seek clarity on what the Canadian government intends to do to live up to its end of the bargain. Finance Minister Jim Flaherty has indicated on several occasions that his counterproposal of forcing banks to sell debt that would convert to equity in times of stress, or contingent capital, is more than a bargaining ploy.
He really likes the idea.
If he continues to like it, Canada's banks will find themselves creating a market for a security that has never been sold. What sort of yield will Canada's banks have to offer on a bond that could revert to less lucrative shares?
Certainly more than on a standard bond. Another question: who decides when the bond must convert to equity? Quite possibly the government, which would represent further narrowing of the leash between Ottawa and Bay Street. This might be better than a tax, but Mr. Flaherty's successful fight against a levy isn't a clean win for Canada's banks. Canada still will be under pressure to live up to its commitment to protect taxpayers from bank bailouts, especially if European countries proceed with their promised levies. There is a risk that financial institutions will flee to non-tax jurisdictions, which is why the G20 statement emphasizes the need to maintain a level playing field. If Canada does nothing to ensure its banks pay a "fair and substantial" price to protect taxpayers from bailouts, then the Harper government risks straining relations with Europe at the same time it is trying to negotiate a trade agreement with the European Union.
The News
It was clear the bank tax debate would end in some face-saving compromise ahead of the Busan meeting. The surprise in the final statement was an ever-so-slight loosening of the G20's deadlines to implement tougher capital and leverage requirements, which Dow Jones explains well in this story.
Finance ministers have been extremely reluctant to move on the tight deadlines that leaders set for overhauling financial regulation in Pittsburgh because history shows the window for achieving such reforms closes quickly once the memory of a crisis fades.
Voters' attention shifts and lobbyists capture the process. But in what amounts to an olive branch, the G20 is telling the global banking industry that it will get a fair period to adjust to new conditions.
"The key thing is to start the implementation in 2012," Mario Draghi, Italy's central bank governor and the head of the Financial Stability Board, told reporters according to Reuters.
"Then we will kind of find out what are the most important transition times."
With renewed concern about a double-dip recession, maybe finance ministers are less worried that people are about to forget why stricter banking regulations are so important?
New World Order?
It appears the older economic powers aren't exactly embracing the rise of the emerging markets. When bureaucratic and/or diplomatic discussions are going nowhere, the politicians call for talks to "accelerate."
So it was in Busan over the G20's pledge in Pittsburgh to give countries such as India and Brazil a bigger say in the running of the International Monetary Fund.
"We called for an acceleration of the substantial work still needed for the IMF to complete the quota reform by the Seoul Summit and in parallel deliver on other governance reforms, in line with commitments made in Pittsburgh. We underscored our resolve to ensure the IMF has the resources it needs so that it can play its important role in the world economy. We reiterated the urgency of implementing the April 2008 package of IMF quota and voice reforms."
Negotiators are bogged down over the formula to determine a nations' quota, or voting shares, in the IMF. The symbolism of this is extremely important to emerging countries and it's a safe bet the U.S. and others won't secure their full cooperation on issues such as foreign exchange rates until the IMF quota issue is resolved.