Sept. 1 (Bloomberg) -- German Chancellor Angela Merkel and French President Nicolas Sarkozy will press fellow Group of 20 leaders to limit the size of banks, regulate the bonuses they pay out and tighten capital requirements.

Merkel and Sarkozy, at a news conference in Berlin late yesterday, said they will outline the joint French-German proposals in a letter to the European Union to help formulate a unified EU position for the G-20 summit in Pittsburgh on Sept. 24-25.

“No bank must grow to a size that puts it in a position in which it can blackmail governments,” Merkel said. “We need agreed international rules on how to ensure this.”

Merkel and Sarkozy, who head the euro region’s No. 1 and No. 2 economies respectively, have sought to present a joint agenda to overcome the global crisis and ensure that there is no repeat. Merkel, running for re-election on Sept. 27, backed Sarkozy over what he called “the bonuses scandal.”

“Bonus payments are the thing that quite rightly drives a lot of people up the wall,” Merkel said, supporting proposals outlined by Sarkozy on Aug. 25 for tougher limits on banker pay.

U.K. Prime Minister Gordon Brown wants bankers’ pay and bonuses to be subject to clawback should performance suffer in subsequent years, and regulators should be able to impose higher capital requirements on financial institutions, the Financial Times reported today, citing an interview.

Merkel and Sarkozy said the G-20 club of industrialized and emerging economies must make commitments in Pittsburgh to prevent any recurrence of the worst economic crisis since 1945, which has caused total writedowns and losses of $1.6 trillion.

Speculation ‘Excesses’

“The excesses of speculation and finance that led to the crisis cannot resume as though nothing had happened,” Sarkozy said.

That also applies to banks’ capital requirements, Merkel said. “The riskier banks’ business is, the higher the capital requirement should be.”

Merkel said she intends to raise the topic of interest rates when G-20 leaders discuss exit strategies to rein in stimulus spending.

Merkel and Sarkozy join the International Monetary Fund in urging the G-20 members to coordinate when they unwind emergency measures introduced to fight the global financial crisis.

As G-20 economic policy makers prepare to meet in London on Sept. 4-5, John Lipsky, the IMF’s No. 2 official, said in an interview that a lack of cooperation “could create strains and costs for other countries.” German Finance Minister Peer Steinbrueck told his G-20 counterparts in a letter that failure to align so-called exit strategies risked “distortions of competition.”

Don’t End Stimulus

Brown was quoted by the Financial Times as saying it was too early for Western economies to abandon stimulus measures.

A German Finance Ministry official told reporters yesterday that a proposal to limit the size of a bank’s balance sheet is an “extreme position.” Systemically important banks may be subjected to higher capital requirements for certain business areas, according to another proposal, the official said on condition of anonymity. No preliminary decisions have been taken at G-20 level on how to prevent banks from growing too big to fail, the official said.

Merkel and Sarkozy joined forces ahead of the last G-20 summit in London in April to demand steps to control executive pay, plus rules governing hedge funds and new “architecture” for financial markets. Merkel has since voiced concern about possible backsliding on past G-20 commitments as the recession has eased.

No Repeat

“We mustn’t waste this opportunity” in Pittsburgh, Merkel said. “To the surprise of many, we’re noting in several financial centers of the world that the banks that got back on their feet again are behaving just like they did before the financial crisis. This mustn’t repeat itself.”

Sarkozy on Aug. 25 cajoled French banks into a promise to stretch two thirds of bonus payouts out over three years and making a third of them in shares. On top of that, France won’t give mandates to handle bond issues or other work to any banks that don’t follow those rules, he said. Sarkozy also called on the G-20 to consider caps on both the total bonus pools of banks and individual bonuses.

Brown said such a move to cap bankers’ pay and bonuses would be difficult to enforce, the Financial Times reported.

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.

To contact the reporters on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net; Helene Fouquet in Berlin at Hfouquet1@bloomberg.net.

Last Updated: September 1, 2009 03:20 EDT