G20 Puts Banks on the Back Burner

NEW YORK ( TheStreet) -- The bank regulatory agenda has been supplanted by trade and currency issues as investors await official pronouncements from the G20 summit taking place in Seoul.

The G20 will forgo a major decision that had originally been on the docket -- dealing with capital requirements for global banks -- when it meets Thursday in Seoul, the Financial Times reported late Tuesday, citing "people briefed on the agenda."

The report says decisions on capital requirements be left to national regulators. However, the summit is reportedly set to make progress on one front of banking regulation: Defining institutions that should be considered "systemically important."

The first group of banks, expected to include U.S. players Goldman Sachs ( GS), Morgan Stanley ( MS), Bank of America ( BAC), Citigroup ( C) and JPMorgan Chase ( JPM), will be defined as systemically important from a global perspective.

Others, likely including most large Asian banks, will be classified as systemically important only within their home countries.

Sheryl Kennedy, CEO of Promontory Financial Group Canada and a former deputy governor of Canada's central bank, says regulatory officials have been working well in advance of the Seoul meeting to reach a broad consensus on such issues as capital requirements and increased oversight of systemically important institutions.

"The technical experts have been very keen to get it all sorted out in advance so it was just a question of blessing proposals made by international regulatory bodies such as the Basel Committee on Banking Supervision(Basel III) as opposed to whole bunch of surprises," Kennedy says.

Kennedy also believes the debate over macro issues like trade imbalances and currency regimes may be so fierce it has left little room for anything else, including moving ahead on bank capital requirements.

"The political analysis could be if they're so busy arguing about that they're not going to do a lot of arguing on the financial reform half of the agenda," she says.

However, Kennedy sees a chance leaders will call for more onerous capital requirements for systemically important financial institutions than many are expecting.

"That would be the one place there might be a possibility of a surprise," Kennedy says

John Chrin, a Lehigh University professor and former co-head of the JPMorgan investment banking unit that advises financial companies, sees such an outcome as unlikely.

"I don't think the G20 summit will impact the 20 largest U.S. financial institutions," he says. "They know where they stand on Basel III at this point. There doesn't appear to be anything that comes out of G20 unless there's a major blow-up with the rest of the world and the United States which causes panic in the dollar or U.S. interest rates."

But even that possibility may be smaller than recently volatile currency markets appear to be anticipating, according to Vincent Reinhart, resident scholar at the American Enterprise Institute and a former director of the Federal Reserve Board's Division of Monetary Affairs.

"G20 meetings have gotten to be sufficiently scripted that I think the goal of every single finance minister is to make sure that nothing surprising happens," Reinhart says.

In this instance, however, Reinhart sees an outside possibility things could get a little more exciting as a result of the Federal Reserve's announcement earlier this month that it would print $600 billion dollar to buy back U.S. Treasury bonds--an initiative better known as quantitative easing, or QE2.

Reinhart says the controversial stimulus by the Fed gives emerging markets countries an excuse to argue on behalf of their trade agendas.

"It gives them the moral high ground to criticize the U.S. and push policies that they've always wanted anyway: namely restrictions on capital flows."

Pushed aside in the tumult has been a proposal from U.S. Treasury Secretary Tim Geithner that would place limits on the amount of trade deficit or surplus countries would be allowed to run relative to the size of their economies.

"The emerging markets participants can say the U.S. acted unilaterally in an attempt to depreciate the dollar," thus diverting the discussion away from Geithner's proposal, in Reinhart's view.

Michael Woolfolk, senior currency strategist at the Bank of New York Mellon, says that though the market has been anticipating fireworks at the G20 meeting, the communiqué to be issued on Friday at the meeting's conclusion will be little more than "a boilerplate type of statement on the foreign exchange front that the group will focus on limiting currency volatility and try to promote global growth."

That could be a modest negative for bank earnings, Woolfolk says.

"In general, increased market volatility in foreign exchange is a positive development for foreign exchange tradingrevenue," he says.

-- Written by Dan Freed in New York.

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