According to leaks on the G-20's progress in Pittsburgh, the major sweeping financial regulatory change the leaders of the world have come up with boils down to a peer review. They might reach a compromise on capital requirements or banker compensation as well. They also decided to let the emerging guys into the party -- G-9 through G-20 will join the G-8 to become part of the permanent council for international economic cooperation. But it's the peer review that I find most noteworthy.

First, a quick word on the inclusion of 9 through 20. I think that it's wise. Clearly, this means that the nations of the G-8 must relinquish some of their power. But given how quickly many of those other nations are growing, it just makes sense to have them be part of the discussion.

Now onto peer review. Here's how it will work, according to the Wall Street Journal:

The scope and effectiveness of the agreement -- which was expected to be signed off on by G-20 leaders on Friday -- will depend on whether and how it is enforced. The potential agreement envisions a procedure where G-20 countries assess whether each others' policies are working, and the International Monetary Fund provides technical help. Not included are any enforcement mechanisms such as sanctions or other penalties.

The reviews will assess how the policies contribute to "strong and balanced growth" of the world economy, a senior G-20 official said. "Who would have thought that the Chinese would have signed up to that?" Germany and China had expressed strong reservations about the concept.

I can't help but think of back in middle school when the teacher had you exchange papers with your classmates and everybody graded each other's work. It's so delightfully quaint. But that excerpt above is quite right: whether or not this peer review is meaningful at all depends on its enforcement and potential penalties for not taking recommended action. Otherwise, it might just amount to peer pressure.

My guess is that enforcement and penalties will be quite weak or non-existent, making these peer reviews more of a way to recommend changes without really requiring any to be taken. In other words, they'd be mostly fluff with little bite. That's probably the only way that countries like China would be willing to sign off.

For example, here's something the Journal talks about:

Under the G-20's proposal aimed at improving coordination of global economic policymaking, the world would reduce its reliance on U.S. consumers. The Chinese would boost domestic demand, the U.S. would trim its borrowing from overseas, and the Europeans would encourage investment, said a number of G-20 officials involved in the talks.

So let's say, in the peer review, the U.S. says, "Listen China. Your people just aren't consuming enough, so your nation needs a major cultural shift." Now China might be able to take some steps to boost demand, but that its government can, or should, change deeply ingrained cultural attitudes seems kind of ridiculous. I'm also pretty amused to see the U.S. to try to trim its borrowing from overseas, especially given President Obama's ambitious agenda.

In any case, I'll be curious to see all of the details of the final agreements they work out. That's why I won't bother going into compensation or capital requirements here -- because it's unclear what the final agreement will look like. But we should know soon enough.