LONDON: They are finally getting more serious on regulation. But success will hinge on delivery, not just detail.

The G20 summit in London will adopt a more detailed approach to overhauling the world's financial rules in a bid to avert a rerun of the credit crunch that has floored economies.

Last November the G20 couched regulatory reform in general terms and Thursday's summit will inject some much-needed detail in a bid to quell criticism from Germany and France.

World leaders will pledge to regulate large hedge funds for the first time and turn the Financial Stability Forum, an informal group of rich country central bankers and regulators, into an oversight board to monitor the global financial system.

The FSF will present detailed proposals and recommendations later on Thursday to toughen up bank capital rules, supervise bankers' pay and bonuses and introduce a more pro-active approach among national regulators to spot problem banks.

The anticipated G20 pledge to regulate and supervise all parts of the financial system across the world will be worthless unless the new oversight board and International Monetary Fund is serious about ensuring national regulators apply the changes.

This is crucial to avoid regulatory arbitrage, where banks shift activities to the lightest touch jurisdiction.
 
SO IS THIS THE NEW BRETTON WOODS?

In a word, no.

Talk from British Prime Minister Gordon Brown and French President Nicolas Sarkozy last year of a new Bretton Woods deal from the G20 was overblown but there will be some real changes.

The summit will endorse expanding the FSF to include all members of the G20, drawing in China, Brazil and India, an acknowledgment of how Asia is becoming an economic powerhouse.

'This will increase the scope of its action and increase its legitimacy. We expect an endorsement from the G20 for a strong institutional mandate,' said Mario Draghi, the Bank of Italy Governor who chairs the FSF.

But the new Financial Stability Board won't become a global policeman with powers to correct behaviour among national supervisors as this would be a step too far for most countries.
 
SHOULD BANKS BE AFRAID?

A welter of new rules will make it harder for banks to undertake risky activities without a substantial cushion of capital, which will inevitably hit profit margins.

The Basel Committee of global banking supervisors, as part of its G20 work, will put forward a package of changes for consultation before the end of the year but it won't take effect until at least the second half of 2010.

It will include a simple leverage ratio to put a floor on risk taking at banks — a step that is a fundamental shift in attitude among some top regulators.

Europe was quick to adopt the Basel II 'risk based' approach for determining bank capital levels. The United States dragged its feet, saying it also wanted to keep a simple leverage ratio to cap bank risks and others are now falling in line.

'I am a convert and I would advise you to do the same,' Basel Committee Chairman, Nout Wellink, told the European Parliament this week.
 
SO BIG CHANGES FOR HEDGE FUNDS?

The G20 will agree to regulate big hedge funds directly for the first time but this is more of a reflection on what is already underway and won't be a shock for the industry.

Germany and France have long gunned for the hedge funds.

New York and London are the world's two main centres for hedge fund managers — the funds themselves are often based in offshore centres like the Cayman Islands.

Big hedge fund managers in Britain already register and provide data on their activities. The EU will come out with a draft law this month to impose such a system across the 27-nation bloc but it won't take effect until 2010 or 2011. The United States plans rules to make hedge fund managers register as well and report data.