G20 'deal on global regulation'

Lord Turner said the future of banking would be 'very different'

The G20 summit is close to agreement on new, tougher principles to regulate the world's financial system.

A report from the G20 working group on regulation has been leaked to the financial website breakingviews.com.

Key recommendations include the strengthening of capital requirements, greater transparency, and more International Monetary Fund (IMF) oversight of systemic risks.

The recommendations closely follow proposed reform of the UK's regulation.

G20 LONDON SUMMIT World leaders will meet next month in London to discuss measures to tackle the downturn. See our in-depth guide to the G20 summit. The G20 countries are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the US and the EU. Q&A: G20 Summit Shake-up for UK banking system Readers' views

These were published on Thursday by Lord Turner, the head of the UK's Financial Services Authority (FSA).

The FSA has made it clear that only a global deal on financial regulation would work, and that proceeding on a purely national basis "would be by far the second best".

The newly leaked document makes it clear that there is a good deal of consensus among the G20 countries' financial regulators about the need for a comprehensive and tough approach.

Among the key recommendations are

• A system-wide approach to financial stability, emphasising 'macro-prudential' tools
• All financial institutions to be subject to regulation if they might cause risks
• Regular meetings of the IMF and Financial Stability Forum to assess global risks
• Requiring banks to build up of capital reserves in good times to act as a buffer in bad times
• Requiring banks to hold more liquidity (cash) buffers
• Government oversight of bankers' compensation schemes to ensure they do not increase risks
• Oversight of credit rating agencies

The deal will still have to be endorsed by the G20 leaders, but it closely follows a framework agreement on restoring lending that was endorsed by the G20 finance ministers in Horsham on 14 March.

Given the disagreements that are emerging on the need for further fiscal stimulus, the leaders will be looking for areas of agreement that will ensure the success of the summit.

However, carrying out any deal on a new global regulatory order will take several years to implement.

And the introduction of any tougher standards on bank capital will need to be delayed until the banks have recovered from their present weakened state.

The draft document, entitled G20 Working Group on Enhancing Sound Regulation and Strengthening Transparency, is dated February 2009.