G-20 Proposals OK Individually, Dangerous in Aggregate, Says SIFMA's Ryan

The G-20 ministers might be very pleased with themselves after a productive several days in Pittsburgh. Tim Ryan, president and CEO of SIFMA, agrees with most of the measures, but isn't so sure the proposed changes would be for the better.According to a release from SIFMA, Ryan said the new initiatives, such as restrictions on executive compensation and better oversight of over-the-counter derivatives, could have a sweeping, negative impact on investors, capital flows, economic growth and jobs when taken in aggregate.

Among the proposals are new requirements for banks to set aside much larger capital reserves by 2010 in an effort to minimize the need for future bailouts. However, says the Times Online, it will be left to individual national regulators to set their own capital requirements.

Although caps will not be imposed on upon bank executives, financial institutions will be required to retain a larger part of their profits, to link pay to long-term performance, to conduct annual independent pay reviews and to provide greater transparency, said the Times. Furthermore, provisions for scaling back pay of poor performers, paying some bonuses in stock and limiting bonuses to a set percentage of revenues in cases of banks with low capital were also proposed.

SIFMA's Ryan noted that the pay proposals are fairly in line with industry efforts to rein things in.

"A responsible approach to executive compensation is crucial to restoring trust and confidence in the financial system," noted SIFMA's Ryan. "Since the crisis, the industry has set new guidelines that support long-term performance and effective risk management. The G-20's proposals linking compensation to performance and risk, making compensation policies transparent and ensuring compensation committee independence are in line with those guidelines. Boards and compensation committees are reassessing their approaches to compensation to ensure that compensation levels are tied to performance and that compensation policies are aligned with the long-term interests of shareholders."

Additionally, leaders pledged to crack down on "regulatory havens" where lax financial regulation and reporting can threaten the integrity of the new rules proposed by the G20 members.

The group also pledged to address trade imbalances and allow developing economies such as China to have greater representation in the IMF by transferring at least 5 percent of representation to under represented countries, said the Times.

Furthermore, trade and economic imbalances were addressed with steps outlined to encourage sustainable, balanced growth, according to the Times. Countries would be required to submit their economic policies to a "peer review" under the auspices of the IMF.

Although SIFMA's Ryan said that each individual proposal has merit, when combined, their effects can be deleterious, given the state of the world's economy.

"International standard setters have unveiled an unprecedented level and range of regulatory and legislative initiatives," Ryan said in a statement. "Before this list of new requirements is implemented, it is critical that we understand their aggregate impact on global economic growth. While individually each initiative may have merit - and the industry supports many reforms - taken together, these reforms could negatively impact investors, capital flows, and economic growth and job creation during a period of global economic vulnerability."