Finance news. My opinion.

The U.K. economy shrank less than previously estimated in the second quarter and mortgage approvals stayed near the highest in more than a year last month, a sign Britain is emerging from recession.

Gross domestic product fell 0.6 percent from the first quarter, compared with a prior measurement of a 0.7 percent drop, the Office for National Statistics said today in London. Banks granted 52,317 loans to buy homes in August, close to the highest level since April 2008, a separate report by the Bank of England showed.

Britain’s worst recession in a generation is easing after five consecutive quarters of contraction. Chancellor of the Exchequer Alistair Darling said yesterday that the recovery may be under way by the end of the year, supported by the government’s stimulus measures and Bank of England asset purchases.

“We should be looking forward to a decent positive number in the third quarter and an even better one in the fourth quarter,” said Alan Clarke, an economist at BNP Paribas SA in London in a Bloomberg Television interview. “But my view is: enjoy it while it lasts. We could see a soft patch in 2010.”

GDP slumped 2.5 percent in the first quarter, the most since 1958 and revised down from a 2.4 percent decline. The recession has now shaved 5.6 percent off gross domestic product. From a year earlier, the economy contracted 5.5 percent, the most since records began in 1956, the statistics office said.

Brown’s Promise

Prime Minister Gordon Brown promised last week to maintain stimulus spending until the recovery is secure. The Treasury plans to sell an extra 220 billion pounds ($349 billion) in debt this year and next year expects a deficit of 12 percent of GDP.

Brown’s ruling Labour Party fell to third place for the first time since 1982 in an opinion poll published today. Both Conservatives and Liberal Democrats led Labour in the Ipsos-Mori Ltd. survey finished Sept. 27.

“Many independent forecasters now believe the U.K. too is coming out of recession. I think it is too early to say so with total confidence,” Darling told the Labour Party annual conference in Brighton, England yesterday. “As long as we continue to support the economy, recovery will be under way in the U.K. by the turn of the year.”

A report by Hometrack Ltd. showed yesterday that U.K. house prices increased the most in two years in September as confidence in the property market improved. Services expanded at the fastest pace in almost two years in August.

GDP Breakdown

In the second quarter, manufacturing fell 0.1 percent, half the amount previously estimated, while construction declined 0.8 percent instead of 2.2 percent, the statistics office said. Services dropped 0.6 percent, unchanged from the prior assessment.

Wolseley Plc, the world’s largest supplier of heating and plumbing gear, said yesterday a decline in profits will slow next year while fund raising from investors along with cuts in working capital helped it pare debt. The Reading, England-based company has shed a total of 30,000 jobs as the recession hammered profit.

Bank of England Chief Economist Spencer Dale said last week that while the economy has “turned a corner,” the U.K. faces a “slow and protracted” climb out of the recession as unemployment continues to rise. The number of people seeking jobs rose in the three months through July to 2.47 million, the highest level since 1995.

Growth ‘Uncertainty’

“The fiscal stimulus is likely to subside from the middle of next year and it leaves a lot of uncertainty about the sustainability of growth momentum,” said Lena Komileva, an economist at Tullett Prebon in London. “The Bank of England may look to counterbalance the draconian tightening that’s in store from the next parliament.”

The household savings ratio, which measures the proportion of post-tax income saved, increased to 5.6 percent in the second quarter, the most since 2003, the statistics office said. Household disposable incomes adjusted for inflation rose 0.9 percent in the second quarter and were 0.7 percent higher than a year earlier.

Consumer spending, which accounts for two thirds of the economy, fell 0.6 percent in the quarter, revised up from a 0.7 percent drop, the report showed.

Gross domestic product will rise 0.3 percent in the third quarter and 0.4 percent in the last three months of the year, the Confederation of British Industry, the nation’s biggest business lobby, said last week. The central bank will start raising the benchmark interest rate from the current record low of 0.5 percent in the first half of 2010, the CBI says.

BOE Decision

Policy makers unanimously decided this month to maintain their plan to buy bonds with newly created money at 175 billion pounds, minutes of the Sept. 10 decision showed last week.

The current account gap widened to 11.4 billion pounds in the second quarter from 4.1 billion pounds in the previous three months, the statistics office said in a separate report today. That’s the most since 2007 and amounts to 3.3 percent of GDP.

“The stimulus is going to start to disappear and there’s going to be a severe and sustained fiscal squeeze that will keep growth relatively sluggish,” said Jonathan Loynes, an economist at Capital Economics Ltd. in London.

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Australian government stimulus spending will need to be eased and interest rates raised as the nation’s economy expands, central bank Governor Glenn Stevens said.

“In due course, both fiscal and monetary support will need to be unwound as private demand increases,” Stevens said in Sydney today. “The bank has already signaled that interest rates can be expected, at some point, to move off their current unusually low levels.”

Without A$42 billion ($36 billion) in government stimulus, almost half of which has been distributed to households as cash, and a benchmark interest rate at a 49-year low of 3 percent, Australia’s economy would have slipped into a recession, Stevens said. Gross domestic product rose 1 percent in the first half of this year, boosted by consumer and government spending.

“This has been a good episode for Australia,” Stevens said in testimony to the Senate economics references committee. “We’re in recovery” and “it’s important these measures be wound back, and we’re on track” for that to happen.

The Australian dollar traded at 86.30 U.S. cents at 11:12 a.m. in Sydney from 86.63 cents before Stevens spoke. The two- year government bond yield rose 8 basis points to 4.19 percent. A basis point is 0.01 percentage point.

Price Bubbles

“There is no sense of urgency in the governor’s message today which would betray a predilection to hike rates at the October board meeting,” said Rob Henderson, chief economist at National Australia Bank Ltd. in Sydney. “But he is resolute that the current ‘emergency’ settings will be unwound at the appropriate time. He is determined to prevent price bubbles.”

Stevens, who faced questions from opposition Liberal party lawmakers and Greens Senator Bob Brown about whether stimulus spending should be withdrawn, said the government’s planned schedule of spending isn’t “terribly worrying.”

“I would hazard a guess that in five years’ time we’ll find the debt buildup isn’t as large as forecast,” Stevens said.

The government expects to post record budget deficits until 2016 as it boosts spending on roads, railways, schools and hospitals. Treasurer Wayne Swan said on May 12 that the shortfall will be A$32.1 billion in the year ending June 30, which is equivalent to 4.9 percent of GDP. Australia’s net debt will peak at 13.8 percent of GDP in fiscal 2014, Swan said.

Economy’s Performance

“My expectation is that the economy is performing a bit stronger” than forecast by the central bank and government earlier this year, the governor said. That will “help the budget through the natural growth in revenue.”

“People are realizing that, though things have been tough, the worst has not occurred and the future is looking brighter,” Stevens said.

Stevens, who slashed the overnight cash rate target by a record 4.25 percentage points between September last year and April, also said policy makers intend to raise borrowing costs to prevent a surge in inflation as the economy expands.

“Interest rates are unusually low, so that means we have some work to do at some point to head back to normal before we get the build up of problems we’ll get if we keep them too low for too long,” Stevens said.

Still, he said the benchmark rate won’t be raised rapidly to last year’s peak level of 7.25 percent. “In the near-term I don’t think that’s a likely prospect,” Stevens said.

Unemployment won’t reach the levels forecast by the government in May, Stevens said today. Treasurer Swan said at the time that the jobless rate, which was 5.8 percent last month, will peak at 8.5 percent by June 2011.

“If it peaks at 6 point something” that would be a “pretty low peak,” Stevens said. “We should be pretty glad if that occurs.”

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Deputy Treasury Secretary Neal Wolin, the department’s No. 2 official, said he expects Congress to revamp financial regulations for Wall Street this year.

Congress is considering legislation that would impose tighter regulations on banks, lenders, and other financial institutions following the worst recession since the Great Depression.

One proposal, the creation of a Consumer Financial Protection Agency, remains a top priority for President Barack Obama, Wolin said in an interview today at a conference hosted by the Congressional Black Caucus in Washington.

The plan would create the consumer agency and move most of the $592 trillion over-the-counter derivatives market onto regulated exchanges and increase capital requirements fast payday loan no faxing. It would also boost oversight of the systemic risks large financial institutions pose to the economy and give the government power to dismantle failed companies.

“There is a definite need for an agency that focuses on consumer protection as part of our overall structure for a financial services regulatory framework,” he said.

Wolin’s office translated the administration’s 88-page financial-regulations proposal into more than 600 pages of legislation for lawmakers to use as a foundation for crafting their proposals.

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World leaders announced the Group of 20 nations is replacing the G-8 as the main forum for global economic coordination, reflecting a shift in power from rich countries to emerging markets.

The decision, unveiled in a White House statement late yesterday, comes as President Barack Obama, Chinese President Hu Jintao and other leaders gather in Pittsburgh for their third summit in a year to reshape the governance of the world economy following the worst financial crisis since the Great Depression. The G-8 will still exist and focus on matters such as development and security matters, Prime Minister Stephen Harper told reporters today. Canada hosts the G-8 next year.

The transfer of influence to the broader group, whose membership ranges from the U.S. to China to Saudi Arabia, symbolizes the fact that the richest industrial nations now lack the sway to govern the world economy alone after their excesses sparked the turmoil that tipped the globe into recession.

“The G-20 needs to prove it can make the tough calls and implement agreed outcomes in a timely fashion,” said Tim Adams, who served as the U.S. Treasury’s top international official under former Secretaries John Snow and Henry M. Paulson, and is now managing director of the Lindsey Group. “I think it will succeed, but the G-20 must prove skeptics wrong, and that will take time and effort.”

‘Premier’ Economic Summit

The G-20 accounts for about 85 percent of global gross domestic product and was created after a spate of currency devaluations plagued emerging markets from Russia to Thailand in the 1990s. The G-8 oversees about two-thirds of global GDP.

Canada will host the first summit of leaders from the G-20 in June under the grouping’s new role as the “premier” global economic summit, Harper said, while a second summit will take place in South Korea in November.

Canada will also hold a summit of leaders from the smaller group at about the same time, Harper said.

“They will be distinctive summits,” Harper told reporters today in Pittsburgh in a joint press conference with South Korean President Lee Myung-Bak. “We are not replacing the G- 8.”

The G-8 meeting was already scheduled to take place June 25-27 in Muskoka, Ontario, where Harper said the G-20 summit will also take place.

A government official, on condition he not be identified, told reporters the two summits will be back-to-back. The official said talks on making the G-20 the main economic forum first began at the G-8 summit in L’Aquila, Italy, last July.

‘One Chance’

“What we are trying to do is create a system for economic cooperation across the world,” U.K. Prime Minister Gordon Brown said yesterday. “We have this one chance to make a huge success of international cooperation.”

Originally a forum for finance chiefs, G-20 leaders met for the first time in Washington last November and again in April in London as they sought to rescue the global economy from its deepest slump in seven decades.

The financial crisis has thrust greater responsibility on to the G-20. At the onset of the turmoil, central bankers used talks near Cape Town in November 2007 to hatch a plan to inject more dollars into markets.

The G-20’s newfound power reflects how the recent slump was led by housing and financial market busts in major economies and the recovery is now being driven by countries such as China. That’s a reversal from previous crises when the G-8 was in the driver’s seat of the recovery effort.

China’s Role

China has already overtaken Germany to become the world’s third-largest economy and may soon be named the biggest exporter. It passed Japan a year ago as the main foreign investor in U.S. government debt. China, Russia, Brazil and India together hold about 42 percent of international reserve assets, excluding gold.

“You can’t possibly have a mechanism” for sustaining global economic stability without including China, said Laura D’Andrea Tyson, an outside adviser to President Barack Obama and former chairman of the White House Council of Economic Advisers under President Bill Clinton. “It’s too big a player in trade and investment.”

Economists at JPMorgan Chase & Co. predict developed economies will shrink 3.3 percent this year and grow 2.8 percent in 2010, compared with emerging-market growth of 0.5 percent and 5.8 percent respectively.

G-20 leaders meeting today are discussing an agenda aimed at tackling global imbalances, restraining banker pay, raising capital at financial companies and revamping control of the International Monetary Fund.

Bretton Woods

The need for economic policy makers to convene regularly grew out of the turmoil that followed the abandonment of the Bretton Woods system of fixed currencies and the oil shock of the 1970s. In 1975, French President Valery Giscard d’Estaing gathered the leaders of West Germany, Italy, Japan, the U.K. and the U.S. at a summit in Rambouillet, France.

The group soon expanded to seven and its influence reached its zenith through the Louvre and Plaza currency accords of the 1980s and with its responses to financial crises in Asia, Latin America and Russia in the 1990s. It hasn’t intervened in foreign exchange markets since a rescue of the euro in September 2000.

Russia joined after the end of the Cold War to expand it to the G-8, although its officials are still not invited to finance and economic talks.

More Investor Attention?

The G-20’s new formal role may prompt some investors who had dismissed the G-7 as irrelevant to pay more attention to international gatherings.

“On G-7 meeting weekends now I go fishing, no reporters call and writing up summaries of the G-7 for the most part is pointless as there is no news,” David Gilmore, a partner at Foreign Exchange Analytics, wrote in a report to clients today.

The G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.

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Taiwan’s central bank kept its benchmark interest rate unchanged on signs the export-dependent economy will recover as the global recession abates.

Governor Perng Fai-nan and his board held the discount rate on 10-day loans to banks at a record-low 1.25 percent, the central bank said in a statement. That was in line with the estimate of all 12 economists surveyed by Bloomberg News.

Taiwan, like its Asian neighbors, has slashed borrowing costs to help the island recover from its first recession since 2001. The stock index has risen 60 percent this year on optimism overseas demand for electronics products will revive an economy that shrank 7.54 percent in the second quarter after contracting 10.1 percent the previous three months.

“Policy makers during the last quarterly meeting reiterated they would stay with the current pro-growth monetary policy until the economy, inflation and job market return to pre-Lehman crisis levels,” said Tony Phoo, a Taipei-based economist at Standard Chartered Bank Plc.

Central banks across the region have stopped cutting interest rates as they gauge signs of recovery. Japan’s central bank on Sept. 17 kept the benchmark overnight lending rate at 0.1 percent, while the Bank of Korea held its rate at a record- low 2 percent on Sept. 10 for a seventh month.

Taiwan’s central bank said its current monetary policy is appropriate and the growth in money supply has been “reasonable.” The bank will intervene to keep the island’s currency stable and respond to “hot money inflows,” it said.

Stocks Fall

Taiwan’s rate decision was released after the close of trading on the island’s stock exchange. The Taiex stock index fell 0.7 percent to close at 7,324.22. The Taiwan dollar weakened 0.1 percent to NT$32.395 against its U.S. counterpart as of 4 p.m. local time, according to Taipei Forex Inc. It touched NT$32.315 yesterday, the highest level since June 2.

Taiwan had cut rates by 2.375 percentage points in seven reductions since late September 2008. That, combined with the government’s planned stimulus of NT$858.5 billion ($27 billion) over four years, have helped boost the island’s recovery.

Shipments to China, Taiwan’s biggest overseas market, are improving as the mainland implements a 4 trillion yuan ($586 billion) stimulus package. Exports, accounting for 70 percent of gross domestic product, declined 24.6 percent in August, less than economists forecast and easing from a record 41.9 percent drop in January.

“We expect the central bank to keep interest rates steady for the rest of the year as there is no inflationary pressure,” said Cheng Cheng-mount, an economist at Citibank Taiwan Ltd.

South Korea, Singapore

Central banks in South Korea, Singapore and Taiwan will likely start to tighten monetary policy early next year as Asian economies show signs of picking up, Barclays Capital economists Wai Ho Leong and Matthew Huang said in a Sept. 22 report.

“Even as deflationary risks subside with higher oil and food prices, the central bank may be inclined to remain on hold, given the amount of slack in the economy,” Leong said, adding Taiwan is unlikely to raise rates before the second quarter of 2010.

The Asian Development Bank on Sept. 22 increased its economic growth forecast for the region on strengthening expansions in China, India and Indonesia, and said it’s too early for governments to withdraw stimulus policies.

Policy makers globally remain on guard about the world economy. Federal Reserve Chairman Ben S. Bernanke said on Sept. 16 U.S. growth may not be strong enough to quickly reduce the jobless rate.

Jobless Rate

Taiwan’s unemployment rate climbed to a record 6.07 percent in August and consumer prices fell even as food costs rose after crops were damaged by the island’s deadliest typhoon in half a century.

The statistics bureau said on Sept. 7 “mild” inflation will return at the start of 2010 as the economy recovers from its deepest recession on record.

Typhoon Morakot dumped record rainfall between Aug. 6 and 9, killing more than 600 people as landslides buried villages and destroyed bridges and roads.

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U.S. home prices rose 0.3 percent in July from the previous month, less than analysts’ estimates, in a sign that the housing recovery is tenuous.

The house price index fell 4.2 percent for the 12 months ended in July, the smallest decline this year, the Federal Housing Finance Agency in Washington said today. The monthly gain was lower than the 0.5 percent increase forecast by 12 analysts in a Bloomberg survey.

“The general economic recovery is weak for one reason: because the housing recovery is weak,” said David Crowe, chief economist of the National Association of Home Builders in Washington.

The U.S. housing market is struggling to stabilize after a three-year slump slashed values 28 percent and led to record foreclosures. While a federal tax credit for first-time buyers and lower prices are bolstering demand, the unemployment rate at a 26-year high has kept many buyers out of the market.

Employers have eliminated almost 7 million jobs since the recession started, the biggest drop of any post-World War II economic downturn. U.S. President Barack Obama and Federal Reserve Chairman Ben S. Bernanke are considering whether to end support for the housing market that has been the source of the global financial crisis.

‘Encouraging’ Recovery Signs

Treasury Secretary Timothy Geithner on Sept. 17 called signs of stabilization in the housing market “very encouraging” and said the Obama administration is studying whether to let the tax credit expire at the end of November.

“If we start to see a major fallback in housing they’re going to have to bring back more federal support,” said Brian Bethune, chief financial economist of IHS Global Insight, a forecasting company in Lexington, Massachusetts. ‘

Eight out of nine areas saw prices decline from a year earlier, FHFA said. The biggest drop was 9.8 percent in the region that includes Nevada and Arizona. California and other Pacific coast states declined 9 percent, and the area that includes Florida was down 5.6 percent, according to the report.

Five out of nine U.S. regions had price increases July from June, led by a 1.6 percent gain in the area that includes California, the FHFA said. New York, New Jersey and Pennsylvania had the second-largest advance with a 1 percent increase.

Homebuilding companies are seeing some signs that demand is improving. Lennar Corp., the third-largest U.S. builder, said yesterday it has started buying finished home sites in anticipation that buyers will return.

Price Forecast

The Standard & Poor’s Supercomposite Homebuilding Index of 12 companies has rallied 38 percent this year through yesterday on the prospect of a recovering market.

U.S. home prices probably will fall 13 percent this year to a median of $172,600, larger than the 9.5 percent decline in 2008, according to a National Association of Realtors’ forecast. Home resales probably will rise 1.1 percent to 4.97 million after a 13 percent drop last year, the group said.

The U.S. median home price tumbled 28 percent over three years to $164,800 in January, the month before Congress passed the American Recovery and Reinvestment Act of 2009 granting the tax credit for first-time buyers, according NAR. It had reached a record high of $230,300 in July 2006. January’s median home price was the lowest in more than seven years.

Lawrence Yun, chief economist of the realtors’ group, estimates that about 350,000 home sales through August were directly attributable to the tax credit. First-time buyers have accounted for 43 percent of home sales since the credit became law, up from 32 percent in the six weeks prior to its passage, according to Washington-based Campbell Communications Inc.

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Global leaders meet this week seeking to deliver the broadest financial regulation overhaul since the 1930s, potentially threatening profits and stock prices of banks from Goldman Sachs Group Inc. to Barclays Plc.

President Barack Obama and his Group of 20 counterparts convene in Pittsburgh on Sept. 24-25 to cement a plan to force banks to curb leverage, hold more equity capital and keep a greater pool of assets that can be easily traded. Restraining bankers’ pay and narrowing imbalances in trade and savings will also feature on the agenda as officials try to hammer out an accord to prevent a repeat of the worst crisis since the Great Depression and ensure a sustained recovery.

By limiting the scope of banks to invest and trade, governments may check this year’s 22 percent gain in the Standard & Poor’s 500 Financial Index. That may be a price they’re willing to pay to prevent a repeat of the risk-taking that sparked the collapse of Lehman Brothers Holdings Inc. a year ago, a worldwide recession and taxpayer-funded bank rescues.

“Regulation will make banks less profitable by increasing the cost of doing business,” said Andrew Clare, a professor at Cass Business School in London and a former Bank of England official. “If banks are going to benefit from taxpayer largesse then they need to act in a way that doesn’t hurt taxpayers or the economy.”

Balanced Economy

The summit, which will also be attended by U.K. Prime Minister Gordon Brown, French President Nicolas Sarkozy and Chinese President Hu Jintao, will also debate how to drive the economic recovery, avoid protectionism, improve accountancy and revamp governance of the International Monetary Fund. The officials will also try to devise a framework to generate a more balanced world economy through greater U.S. savings, European investment and Chinese domestic-demand.

Leaders travel to the Steel City amid voter disquiet after governments used public money to bail out banks only to see many of them quickly return to profit and resume setting aside billions for bonuses. Seventy-three percent of U.K. voters polled this month by YouGov wanted a tax imposed on all bonuses over 10,000 pounds. A Gallup poll in June showed that 59 percent of Americans wanted action to curb executive pay.

Capital Levels

Under consideration: forcing banks to augment their capital buffers to better account for risk, retain more earnings and satisfy a leverage ratio, which measures equity as a proportion of total holdings. They may also consider a proposal to tie pay to capital levels from Financial Stability Board Chairman Mario Draghi.

“There has been a culture that rewards short-term thinking, that used leverage to take exorbitant risks that were unsustainable for the system as a whole,” Obama said in a Sept. 14 interview with Bloomberg Television. “That’s the culture I think that we’ve got to reverse.”

The crackdown could lower profitability by a third at Goldman, Barclays and Deutsche Bank AG’s investment bank, JPMorgan Chase & Co. analysts led by Kian Abouhossein said in a Sept. 9 report.

Deutsche Bank’s return on equity will probably tumble the most among the world’s largest investment banks, falling to 6.7 percent in 2011 from 10 percent today, the analysts said. Goldman’s return on equity will decline by 4.4 percentage points and Barclays’ by 4.3 points.

Stock Drop?

“The amendments to capital requirements will clearly affect the activities of banks in their trading books and securitizations,” said Alessandra Mongiardino, a London-based analyst at Moody’s Investors Service.

Spokespeople for Goldman, Deutsche Bank and Barclays declined to comment.

Investors may suffer if financial companies have to issue more equity, said Charles Goodhart, a former Bank of England official and now a professor at the London School of Economics.

“Banks will have to raise more capital by issuing more equity so existing stocks will generally go down,” Goodhart said. The IMF estimated in April that U.S. and European banks would need $875 billion in extra capital.

To be sure, Goldman has demonstrated that higher capital and lower leverage don’t always mean reduced profits insurance quotes.

Record Profit

The company, which set aside a record $11.4 billion for compensation and benefits in the first half, cut its ratio of assets-to-common equity to 16 times in the second quarter from 26 times a year earlier. Goldman still set a new Wall Street profit record this year, making $3.4 billion on $13.8 billion of revenue in the three months that ended in June.

The new rules will probably also take years to go into effect, with U.S. Treasury Secretary Timothy Geithnerproposing that new capital requirements be in place by the end of 2012.

The British Bankers’ Association told Brown that tighter controls may stymie banks’ ability to help revive the economy. “Financial institutions cannot take steps to further increase the amount of capital they hold and at the same time lend that capital to businesses and consumers,” Stephen Green, chairman of the group and HSBC Holdings Plc, said in a letter today.

Since the demise of Lehman, some banks have already cut leverage, boosted capital by selling stock, and set aside a larger pool of easy-to-sell, or “liquid,” assets.

Raising Funds

Morgan Stanley, the sixth-biggest U.S. bank by assets, raised $6.92 billion through stock sales in May and June and cut its ratio of total assets-to-common equity to 18.3 times at the end of June from 30.9 times a year earlier. Barclays’ so-called surplus liquidity jumped to 88 billion pounds ($145 billion) at the end of June from 36 billion pounds six months earlier.

“Banks have already changed so substantially that it’s unlikely the G-20 can impose a further pinch in terms of beefing up liquidity or reducing leverage,” said Simon Gleeson, a regulatory lawyer at Clifford Chance LLP, the second-biggest law firm, in London.

Any agreement on capital buffers could see European banks as the biggest losers, which could provoke the ire of Sarkozy and German Chancellor Angela Merkel, who faces elections on Sept. 27. The region’s banks may have to sell more stock than U.S. rivals to satisfy new capital rules having relied on so- called hybrid securities to meet the current requirements.

New Rules

“It would be paradoxical if European banks were to be penalized in terms of competition against U.S. banks, given that the crisis originated in the U.S.,” says Baudouin Prot, chief executive officer of BNP Paribas SA, France’s largest bank, at the French Senate Finance Committee in Paris on Sept. 16. He said a leverage ratio would be “extremely difficult” to introduce.

Merkel and Sarkozy have campaigned for the G-20 to focus instead on bonuses, arguing excessive executive pay played a role in triggering the crisis. The summit may fall short of “high expectations,” Merkel said Sept. 19.

Financial firms and other companies should link executive pay to incentives that encourage measurable, long-term benefits for the business and shareholders, a Conference Board study recommended today. “In order to restore trust in the ability of boards of directors to oversee executive compensation, immediate and credible action must be taken,” the New York-based research group said.

‘Pushing Back’

The risk for politicians trying to persuade voters they haven’t let bankers off the hook is that the financial industry eventually finds a way around the regulatory revamp.

“We aren’t doing anything significant so far, and the banks are pushing back,” said Nobel laureate Joseph Stiglitz, a professor at Columbia University. “The leaders of the G-20 will make some small steps forward, given the power of the banks” and “any step forward is a move in the right direction.”

The G-20 accounts for about 85 percent of the world economy and the Pittsburgh talks will the third summit of its leaders in the past year. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.

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Belgian consumer sentiment held at the highest in 12 months in September as “slightly gloomier” sentiment on the economic outlook offset greater optimism about household savings, the central bank said.

The consumer sentiment index for Belgium, the sixth-largest economy in the euro region, was unchanged at minus 11, the same as in August and the highest since September 2008, the Brussels- based National Bank of Belgium said today in an e-mailed statement. The gauge advanced in the five previous months payday loan lenders.

The economy of the euro-region economy barely contracted in the second quarter as Germany and France unexpectedly returned to growth, suggesting the deepest recession since World War II is bottoming out.

Consumers in Belgium were less optimistic about the economic situation in the next 12 months, as this gauge fell to 6 from 7 in August.

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Paul Volcker, a former Federal Reserve chairman and now a outside economic adviser to President Barack Obama, criticized the administration’s plan to give the Fed authority to supervise “systemically important” financial firms.

“I don’t know what systemically important institutions are,” Volcker said. “But I’m sure that if you picked them out, people will assume they’re going to be saved, that they’re too big to fail.”

Volcker’s remarks appeared in the form of a “conversation” with Gary Stern, who retired last month as president of the Fed Bank of Minneapolis, and published in “The Region,” the bank’s quarterly bulletin. Volcker, 81, is chairman of the Economic Recovery Advisory Board, a body created by Obama in February to recommend responses to the crisis.

Obama’s plan to give the Fed powers to monitor risks to the financial system is aimed at avoiding a repeat of the financial meltdown that led to $1.6 trillion of bank losses and writedowns and triggered a global recession. The Obama plan would label banks including Bank of America Corp. and Citigroup Inc. as “systemically important” and subject them to capital and liquidity requirements and stricter oversight.

Jen Psaki, a White House spokeswoman, declined to comment on Volcker’s remarks.

Council of Regulators

The plan has drawn criticism from lawmakers including Senate Banking Committee Chairman Christopher Dodd, who has said the central bank failed to use its existing supervisory powers to curb some of the lending practices that contributed to the crisis. Congressional leaders are leaning toward vesting authority over capital, liquidity and risk-management practices of big banks in a council of regulators.

The administration also wants the power to seize financial institutions if they run into trouble. And Obama’s regulatory framework would make it mandatory for large hedge funds, private-equity firms and venture-capital funds to register with the Securities and Exchange Commission.

Volcker said the central bank should instead oversee bank regulation carried out by an independent agency. The chairman of that agency could also be a vice chairman of the Fed, both to keep the central bank in the loop and increase accountability.

Volcker, who was Fed chairman from 1979 to 1987, said the central bank itself needs some reorganization “to more clearly focus responsibility for the regulatory side of the house.”

“There’s no doubt in my mind that the attention the Federal Reserve has paid to regulation has gone up and down over the years, depending upon both the intellectual and market environment, and the personalities involved.”

Hedge Funds

He also would limit regulation of non-bank financial institutions such as hedge funds.

“If they get big enough, then they’re going to need capital requirements and leverage requirements,” Volcker said. “But I don’t think that’s going to be many firms. I’d like to create the impression, to the extent you can, that there’s no automatic bailout of those institutions.”

Volcker said he has a different “regulatory philosophy” than the Treasury Department. Banks, he said, provide basic financial services, including payments and credit, and should have some government protection and support.

Hedge funds, private equity, and proprietary trading are different businesses, Volcker said, and should be kept separate from banking. He cited Goldman Sachs Group Inc., which became a bank holding company last September, took government aid, and yet has a large proprietary trading operation that is responsible for much of its profit.

Taxpayer Support

“There’s nothing wrong with making money,” Volcker said. “But I don’t want them to make money by taking risks with the support of the taxpayer.”

An industrial company such as General Electric Co. presents another problem, he said.

“It’s certainly not a bank in any traditional sense, but it’s a big financial business,” Volcker said. “Do you want to get into the business of directly or indirectly supporting General Electric?”

Volcker, who pushed the federal funds rate as high as 20 percent to throttle inflation in 1980, also took issue with the current Fed’s management of monetary policy. Its statements are confusing, he said: on the one hand they worry about inflation falling, on the other, the commit to price stability.

“I say, ‘Look, make up your mind,’” Volcker said.

He disagrees with Fed Chairman Ben S. Bernanke’s call for an inflation target. “I have not been in favor of inflation targeting,” Volcker told Stern. “I just don’t like it symbolically.”

In congressional testimony in February, before the administration released its financial-overhaul plan, Volcker said giving the Fed additional regulatory authority would distract members from their main job of making monetary policy.

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The Philippine government reported a fourth monthly budget deficit in August as tax revenue faltered amid the global recession, prompting the peso to fall.

The shortfall of 22 billion pesos ($460 million) widened the eight-month deficit to 210 billion pesos, the Finance Department said in an e-mail in Manila today. Spending fell 0.2 percent in August from a year earlier and revenue dropped 20.1 percent after falling 3 percent in July.

Slowing economic growth earlier this year prompted the government to widen its 2009 budget-deficit target to a record 250 billion pesos, as the global slump hurt tax collection and forced President Gloria Arroyo to boost spending. The budget report may revive investor concern about the strength of the Philippine economy, said Antonio Espedido at China Banking Corp.

“The budget deficit is a sign of weakness,” said Espedido, a Manila-based treasurer at China Banking. “If there’s a sign of weakness, some investors try to pull out of the country.”

The peso, which was little changed before the announcement, fell 0.2 percent to 47.895 a dollar at 10:02 a unsecured personal loans.m. in Manila, according to Tullett Prebon Plc. The Philippine Stock Exchange Index dropped as much as 0.6 percent.

The Philippine government said yesterday it had sold 100 billion pesos of so-called retail bonds, in an offering scheduled to end Sept. 22. That compares with 70 billion pesos last year.

Dollar Bonds

The government sold $750 million of U.S. dollar bonds in July, adding to $1.5 billion sold in January. Its targeted 2009 budget deficit would be the biggest since Bloomberg data began in 1985.

The Southeast Asian nation’s economy grew 1.5 percent in the second quarter from a year earlier, accelerating from a decade-low 0.6 percent the previous three months.

The Bureau of Internal Revenue, responsible for more than 60 percent of government earnings, collected 67.6 billion pesos in August, 14 percent lower than a year earlier, according to the budget report today. Collection at the Bureau of Customs fell 28.5 percent.

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