U.S. President Barack Obama and French President Nicolas Sarkozy at the G8 in Huntsville.POOL
The need for banks to hold more capital to cushion against disaster will be in focus Saturday as world leaders shift their attention to financial reform and economic growth with the beginning today of the Group of 20.
A consensus on how to drive growth may be out of reach, and countries appear irreconcilably divided on the issue of a bank tax, but there's hope for broad agreement on bank capital levels as the leaders transition from the G8 summit to the G20 and its financial and economic agenda.
"There's much more consensus the global system is under-capitalized," Bank of Canada Governor Mark Carney said Saturday in a radio interview. "I think we are going to move to a common agreement on what that capital is and what the level needs to be by the Seoul summit in November. We're making serious progress on capital."
American officials are signaling U.S. President Barack Obama will push hard on capital agreement as the meetings in Toronto begin later Saturday.
Mr. Obama enters the G20 on the heels of a big win, having just got a financial reform package through Congress Friday, which may prod leaders in Toronto to move their own reform agendas forward, said Canadian Prime Minister Stephen Harper.
"The progress that the U.S. has made will be important in driving the world not just to agreements here but to conclusions on financial regulations within the kind of timeframe we've been looking at," Mr. Harper told reporters Friday night in Huntsville.
Mr. Obama's press secretary, Robert Gibbs, said Friday that getting the U.S. reform bill passed was "just a tremendously important step as we come here to discuss the state of the recovering world economy."
Still, there is work to be done to get major economies on the same side on bank capital. There is broad consensus on the need for stronger capital, which the G20 highlighted as a goal at its gathering in Pittsburgh last year. However, how fast banks should be forced to strengthen their balance sheets is a point of contention.
Europe is pushing for a slow implementation period to give its banks time to adjust, while the U.S. would prefer a faster move. Raising capital is expensive for banks, and holding bigger cushions cuts into profitability, a tradeoff for the added stability of big cash hoards.
The discussions will be closely monitored by banks in the host country.
Banks in Canada are already sitting on large bulwarks of capital and are keen to get a decision. Bank executives here are concerned that they might be at a competitive disadvantage if other banks in Europe and the U.S. are allowed to run with slimmer capital for long.
Mr. Carney acknowledged the likelihood that this weekend's meetings could result in various G20 countries going in different directions on whether to tax banks to pay for future bailouts, as well as the possibility that what started a week ago as a push for specific deficit-cutting targets may produce little more than an agreement on broad guidelines. Still, he said leaders are nonetheless on track to have a deal on bank capital in place before their next summit in Seoul later this year.
"I think we are going to move to a common agreement on what that capital is and what the level needs to be by the Seoul summit in November. We're making serious progress on capital," Mr. Carney said on CBC Radio One.
Similar to comments made by Finance Minister Jim Flaherty earlier this week, Mr. Carney said it would be fine if nations acted differently on the bank tax proposal, while repeating his position that such levies could create so-called moral hazard by spurring institutions to take more risks because they would know a rescue fund was available if they got into trouble.
On the subject of how quickly and aggressively advanced economies should attack their budget shortfalls, Mr. Carney said the G20 leaders should draw up some guidelines, but because the global recovery will be ``increasingly uneven over time,'' what's needed from countries is ``going to be different, the timing is going to be different, the order of magnitude is going to be different.''
Deficit-cutting must not be too fast because some economies still need stimulus, but also shouldn't be too slow ``because ultimately we'd all pay the price for that,'' Mr. Carney said, illustrating the delicate balance leaders face this weekend in trying to forge a united front on the issue, as European countries slash their budgets relentlessly to keep bond markets happy while U.S. President Barack Obama urges caution and has suggested more stimulus might be needed in the near term to secure the rebound.
Because of the shaky U.S. recovery, the impact of the march to austerity in Europe and the new financial regulations, which the G20 hopes to start implementing by the end of 2012, Mr. Carney reiterated that the global outlook is ``uncertain.'' He also said Canada's economic performance will be held back in coming years by the troubling combination of weak labour productivity and an aging workforce.
At the same time, Mr. Carney said prices and demand for commodities are going to increase over the longer term, which bodes well for countries like Canada that produce the energy products and metals that are fuelling rapid growth in emerging markets.