The G20 revolution: Kohler

French President Nicolas Sarkozy has labelled the decisions made about the financial system at the G20 meeting in Pittsburgh a “revolution”, and if they are followed through he’ll be right.

It’s always easy to be cynical about political grandstanding events such as these, but while the communiqué was, as usual, about 80% waffle, there were three very significant statements made about the financial system:

– Banks should hold more capital, and big banks should probably hold even more;

– Governments should have a role in limiting bank salaries, and that standards proposed by the Financial Stability Board should be endorsed;

– All derivatives should be traded on exchanges “where appropriate”, not over the counter.

These things, if followed through, will represent a massive intrusion by government into the free market.

The FSB, for example, has said that more than 50% of financial sector bonuses should be awarded as shares or “share-linked instruments” and there should be an absolute limit on bonuses as a percentage of total net revenue.

In addition to endorsing the FSB standards, the communiqué is unusually specific on the question of compensation of executives in the financial sector. It calls for such things as avoidance of multi-year guaranteed bonuses, requiring a “significant” proportion to be deferred and able to be clawed back, plus transparency and independence for the compensation committees.

It’s true, as Shadow Treasurer Joe Hockey says, that shareholders own these businesses and in theory it’s up to them what they want to pay their executives.

But we all know there are two problems with that: the shareholders don’t really decide, and we now know that the impact on the real world of too much risk-taking by bankers in pursuit of bonuses can be devastating, leading to disruption and unemployment. Therefore, governments clearly do have a role.

On the question of capital there is broad agreement among all nations that bank capital requirements should be increased, but there is a split between Europe and America over whether the largest, systemically important, banks should hold more capital than the others (that’s what America wants).

The US Deputy Treasury Secretary told a group of bankers over the weekend: “The largest, most interconnected firms should face significantly higher capital and liquidity requirements.”

And finally, dragging OTC derivatives into the sunlight of exchanges and electronic trading platforms is an idea whose time has definitely arrived.

Again the G20 communiqué was unusually specific about this, even putting a timetable on it: “All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest.”

Basically the leaders meeting in Pittsburgh have sent a message to their bureaucrats: we say we want a revolution, well you know, we want to change the world (to misquote the Beatles).

Now watch the lobbying crank into gear to oppose it.

This article first appeared on Business Spectator.