G20 must make Basel III top priority - sources

LONDON/BERLIN Tue Apr 20, 2010 7:59pm IST

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LONDON/BERLIN (Reuters) - Agreeing tough new bank capital rules should take precedence over imposing a bank levy in global efforts to learn from the financial crisis, the G20 countries will be told later this week, sources said on Tuesday.

The group of leading developed and emerging economies will gather on the sidelines of an International Monetary Fund meeting in Washington on April 22-23.

The IMF and the Financial Stability Board (FSB), which is tasked by the G20 to coordinate implementation of regulatory reform, will present a joint report to finance ministers on how to deal with "too big to fail" banks that seeks to shield taxpayers from having to bailout the sector in future.

"The main message coming through this document from central banks and regulators is that priority number one is Basel III, while the practical study of a bank levy should come after the results from the study on the impact of Basel III," two sources involved in the G20 process said.

"The IMF and FSB fear that otherwise discussions on a bank levy could sap political momentum on Basel III," the sources added.

The G20 has agreed to introduce Basel III -- a much tougher version of the existing Basel II global accord on bank capital requirements -- by the end of 2012.

Banks and some countries want it watered down or delayed, saying that otherwise economic recovery could be threatened.

The IMF-FSB report will say the Basel Committee on Banking Supervision, which drafted Basel III, is also studying possible capital surcharges on large, risky banks.

They want Basel to complete this work first before the G20 decides on whether to also impose a separate levy or tax on banks to pay for bailouts, the sources said.

Surcharges and a levy could be introduced together if combined in the right way to avoid market distortions and overly heavy regulatory burdens on banks, the sources added.

BANKS A HOT TOPIC

Japanese Finance Minister Naoto Kan said on Tuesday the issue of banking regulation will be a "hot topic" in Washington.

The meeting will also discuss the fraud lawsuit filed by the U.S. Securities and Exchange Commission against Wall Street bank Goldman Sachs, Kan said.

Expectations had been rising of progress at the meeting to agree a global tax on banks to pay for bailouts.

No real progress is now expected as European Union countries are divided over how the money raised should be used while Canada opposes the principle of a tax.

"He will push for a bank levy based on the model that Germany and the United States have proposed," a senior German official said of Finance Minister Wolfgang Schaeuble.

"There are different positions here within the G20. It looks like the IMF has a preference for a bank levy as opposed to a financial transaction tax," the German official said.

Recent G20 correspondence has also stressed the need for everyone to apply the existing Basel II accord by 2011 as a first step -- a reference to unease in Europe that the United States is still lagging on its implementation.

Introducing its successor Basel III in 2012 is seen by central bankers and regulators as the acid test for G20 efforts to make the financial system more stable and less risky.

The FSB and Basel are anxious that G20 countries hold their nerve in the face of lobbying by banks and some countries.

Basel Committee Chairman Nout Wellink said on Saturday the committee was accused by France of being biased in its approach and he urged everyone to wait until the impact assessment is completed in June.

Japan's banking industry lobby says the Basel package fails to take into account local differences.

Danish Economics and Business Affairs Minister, Brian Mikkelsen said his country's mortgage credit system is in jeopardy from the Basel proposals.

(For more business news on Reuters Money visit www.reutersmoney.in)

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