No one is taking the Kool Aid away from the partying financial markets, not just yet.
But many of the partygoers in banks and other financial groups face tougher rules on dividends, pay, profits, capital and balance sheet management that could very well cut future earnings growth and lift costs.
Given the importance of the banks to the Australian economy and market, the changes (which are based on changes already mooted by the main regulator, APRA) will have an impact on the market and investment as they are brought in from now until 2013.
Slower, lower growth is in prospect as a result of the Group of 20 meeting.
The Group of 20 leaders summit in the US agreed to a new era of economic co-operation, endorsed the new guidelines for bankers pay, a tight timetable for regulatory reform and a new framework for balanced global economic growth.
The meeting also said the G20 will replace the G8 as the main forum for steering the world economy.
But little progress was made on freeing up world trade or climate change ahead of the Copenhagen summit in December.
But the era of cheap money continues and the markets ought to rejoice, because it’s that which has powered the 50% plus rise in the Dow, the soaring Aussie and other markets, and helped push oil, copper and gold higher and forced bond yields lower.
"We will avoid any premature withdrawal of stimulus," the leaders said on Friday after the two-day summit in Pittsburgh.
"At the same time, we will prepare our exit strategies and, when the time is right, withdraw our extraordinary policy support in a cooperative and coordinated way, maintaining our commitment to fiscal responsibility."
President Barack Obama said action by the Group of 20 nations since April has "brought the global economy back from the brink".
"Financial markets have come back to life, and we stopped the crisis from spreading further to the developing world," Obama said in Pittsburgh on Friday as the G20 Summit ended.
"Still," he said, "we know there’s much further to go."
He said coordinated efforts have saved millions of jobs and set the world on the road to more economic accountability and less rewarding of "short-term greed".
"Going forward, we cannot tolerate the same old boom-and-bust economy of the past," the president said.
Well yes, but that is what we have now in spades.
But in reality it is the cheap money (in the US its 0% to 0.25% from the Fed and 1% in for Eurozone banks and around 0.10% for Japanese banks) that is financing the continuing rebound around the world, and the slow re-awakening of some economies.
China has chipped in with its own version of cheap money (just lots of it); we in Australia and other countries in the region, are hitched to China’s rebound, not the G20 words.
The G20 leaders did take actions which will have an impact here on banks.
They agreed to back new global standards for financial pay schemes and require banks to build up their capital bases if necessary by reducing pay-outs.
The rules – developed by the Financial Stability Board (with Reserve Bank involvement) for the first time include specific guidelines on the proportion of bankers bonuses that should be paid in the form of deferred compensation.
The meeting ordered banks to immediately adopt constraints on compensation and told them they will face tighter capital controls by 2013.
Banks were also told to avoid “multi-year guaranteed bonuses” and a “significant portion of variable compensation” must be deferred, paid in stock, tied to performance and subjected to clawbacks if earnings fall.
But the G20 stopped short of endorsing a French proposal to introduce specific caps on bankers’ pay.
Awards must also be curbed if they are “inconsistent with the maintenance of a sound capital base”.
Officials said the G20 backed an FSB recommendation that regulators should be prepared to limit the share of profits paid out in bonuses, dividends and share buy-backs by banks that were likely to need to build up their capital to meet tougher future regulatory standards.
Regulators should be allowed to modify the compensation practices of key firms (which is what APRA is proposing to do in Australia).
Banks will also have to increase the quality and quantity of capital they hold as a buffer against future losses by the end of 2012.
They promised to develop special resolution mechanisms for financial firms and said top banks should develop “living wills”.
Which is a fancy way for telling banks they should draw up a plan for their break up and liquidation, and this in turn would mean having a very good understanding of all the uses to which its capital has been put, assets and where they are held, computer systems, staff and real estate.
Under the new standards supervisors will require that a substantial proportion of senior bankers’ bonuses, such as 40% to 60%, be deferred (the much derided Macquarie Group has long had a form of deferred compensation for executives).
For top bankers, the proportion should be “substantially higher, for instance, above 60 per cent”, the FSB said.
These payments would be deferred for at least three years and would be subject to potential claw-back in the event of future poor performance.
The FSB said a “substantial proportion such as more than 50 per cent” should be in the form of shares “subject to appropriate share retention p
