Sept. 26 (Bloomberg) -- Leaders of the Group of 20 countries said they will implement financial regulatory reforms that “raise standards together” to prevent companies from seeking out jurisdictions with less-stringent oversight.

Rules will be developed by the end of 2010 to require banks to hold more and better-quality capital and discourage leverage, the leaders said in a statement yesterday at the end of a two- day summit in Pittsburgh. The G-20 agreed to change compensation policies to tie pay to longer-term performance and create systems for safely winding down larger cross-border firms.

Governments and regulators are trying to ensure that financial institutions have a cushion against losses so they won’t turn to taxpayers for bailouts again. Today’s statement marks a shift from a few years ago, when nations reduced regulation to compete for financial companies and markets, said Margaret E. Tahyar, a partner in the financial institutions practice at law firm Davis Polk & Wardwell LLP in New York.

“What this is signaling is that the race to the bottom in international regulation and competition is officially dead,” Tahyar said. “The statement is unusually granular and that shows how serious they are.”

The G-20 said it will depend on the Basel, Switzerland- based Financial Stability Board, led by Bank of Italy Governor Mario Draghi, to report on progress before the next G-20 summit. The Financial Stability Board, made up of national central-bank representatives, finance ministries, supervisory authorities and standard-setting bodies, recommended some proposals adopted by the G-20.

‘Stronger Capital Standards’

“Our reform is multifaceted but at its core must be stronger capital standards, complemented by clear incentives to mitigate excessive risk-taking practices,” the G-20 said. “Capital allows banks to withstand those losses that inevitably will come.”

The countries committed to conduct “robust, transparent stress tests as needed” and called on banks to retain a greater portion of current profits to bolster capital. The statement didn’t go as far as the Financial Stability Board recommendation that banks restrict dividends, stock buybacks or compensation.

The G-20 said it would support introducing an international leverage ratio, adjusted for differences in accounting regimes, that could supplement existing Basel II risk-based standards.

The leaders called on financial companies deemed “systemically important,” meaning that their failure would pose a risk to the entire financial system, to develop contingency and resolution plans that work internationally.

‘Unprecedented’

Tim Ryan, chief executive officer of the Securities Industry and Financial Markets Association, said the range and level of the G-20’s proposals are “unprecedented.” The trade group said it represents more than 650 securities firms, banks and asset managers.

“While individually each initiative may have merit and the industry supports many reforms taken together, these reforms could negatively impact investors, capital flows, and economic growth and job creation during a period of global economic vulnerability,” Ryan said in a statement after the meeting.

The Financial Stability Board plans to propose by the end of October possible methods for dealing with the biggest and most connected companies, including additional requirements for capital, liquidity and supervision, the G-20 said.

To reduce the risk of derivatives traded over the counter, the G-20 proposed moving all standardized contracts onto exchanges or electronic platforms, where appropriate, by the end of 2012. Trades should be cleared through central counterparties and reported to trade repositories, the G-20 said. Some contracts would be subject to stricter capital requirements.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

Last Updated: September 26, 2009 00:00 EDT