The G-20 finance ministers want to cut short-term bank risk and put in long-term capital requirements that should, in theory, prevent a repeat of the crisis that nearly brought the world's credit markets to their knees. The problem with the programs being suggested is that may not be approved and implemented in every country. Congress could disagree with with the philosophy set out at the G-20 meeting in London, although Treasury Secretary Geithner agrees with them. That would prevent the largest economy on Earth from being part of what is supposed to be a coordinated plan.
One of the key to the proposals is "stronger regulation and oversight for systemically important firms, including: rapid progress on developing tougher prudential requirements to reflect the higher costs of their failure; a requirement on systemic firms to develop firm-specific contingency plans," the G-20 memo says. But, it is hard to determine which banks fail into the "systemically important firm" category and it is nearly impossible to determine whether all 20 countries will identify those companies using the same yard stick.
Another important aspect of the proposal is that the bank ministers want "rapid progress in developing stronger prudential regulation by: requiring banks to hold more and better quality capital once recovery is assured." Higher capital requirements usually mean lower profits, at least temporarily. The could cause a drop in bank earnings and even a need for some financial firms to raise more money, further diluting current shareholders.
The goals may be good in theory, but may be nearly impossible to implement because they undermine the interests of so many parties involved in the financial system
Douglas A. McIntyre is an editor at 24/7 Wall St.