The New York Times / June 28, 2010 Report Warns That Many Banks Still Vulnerable to Crises By JACK EWING
BASEL, SWITZERLAND — An organization that brings together most of the world’s major central banks said Monday that the easy money that has propped up the banking system during the financial crisis must soon be withdrawn — even as it warned that many banks are still in fragile health. “Exceptional government and central bank support was needed to quell the enormous uncertainty and market disruption during the crisis,” said Jaime Caruana, general manager of the Bank for International Settlements, whose board includes the U.S. Federal Reserve chairman, Ben S. Bernanke, and the European Central Bank president, Jean-Claude Trichet. “But keeping support measures in place over a long period creates moral hazard,” meaning it can encourage risky behavior, Mr. Caruana said at a news conference following the organization’s annual meeting in Basel. Many banks in Europe and the United States remain heavily leveraged and dependent on central bank support, the B.I.S. said in its annual report. Without naming specific countries, the report said that policymakers must begin raising official interest rates to avert inflation and wean banks from their dependency on the massive amounts of cash that the E.C.B., Fed and other central banks have provided. “You may need to raise rates before your comfort zone, that is what we are saying,” Mr. Caruana said. The underlying message from Mr. Caruana, former governor of the Bank of Spain, and of the B.I.S. report seemed to be that many banks will soon face a day of reckoning. The removal of government and central bank support and a return to higher interest rates, along with public stress tests planned for European banks, will force them to write down losses on toxic assets and depend on markets for funding. Banks will also face more regulation that, the B.I.S. report said, may crimp short-term profits but provide more reliable earnings over time. Mr. Caruana dismissed assertions by the banking industry that new regulations will cripple economic growth. The costs of new rules, which include requiring banks to hold more capital in reserve, are “low and temporary,” Mr. Caruana said. Mr. Caruana also said that he does not expect any delay in implementing new banking rules, despite signals to the contrary from the meeting of the G-20 nations in Toronto last weekend. “The only thing I read there is significant support,” Mr. Caruana said. Detailed proposals will be ready by the G-20’s November summit, he said, though he added that implementation of new regulations will depend on the state of the economy. While the participants in the Toronto talks said they intended to adopt the rules by the end of 2012, they cautioned that the standards would be “phased in over a time frame that is consistent with sustained recovery and limits market disruption.” Those negotiations over what is being called Basel III are conducted by the Basel Committee on Banking Supervision, a body of regulators that meets at the B.I.S. headquarters, but is separate from the settlements bank. The Basel Committee, which sets standards that are then carried out by national regulators, wants to tighten the definition of what can be counted as Tier1 capital, which is the basic measure of what banks hold against the risk of future losses. The committee also wants banks to have enough liquid assets to survive a short-term market plunge, by reducing their dependence on short-term wholesale financing. But banks across the world have been pressing for a delay or even a rewriting of the proposed rules, in part by arguing that the new standards could hamper the global recovery. Mario Draghi, the chairman of the Financial Stability Board, a global coordination body that works closely with the Basel Committee, said Sunday that it would be better to delay putting the standards in effect than to weaken them. “The quality and amount of capital in the banking system must be significantly higher to improve loss absorbency and resiliency,” Mr. Draghi, the governor of the Bank of Italy, wrote in a letter to the G-20 leaders. The B.I.S. also joined the G-20 in calling for governments to reduce their deficits, arguing that solid public finances will promote economic recovery by raising confidence. “It’s not just market confidence, it’s also consumer confidence and investor confidence,” Mr. Caruana said. “The risks of not moving rapidly in fiscal consolidation are high.” While noting that emerging markets such as China, India and Brazil have bounced back from the global recession quickly, the B.I.S. warned that they face higher inflation and other symptoms of overheating if interest rates remain low. Borrowing by consumers has risen, real estate prices are up and international investors are funneling money to emerging markets because of the better returns they offer compared with the United States, Europe and Japan. In comments that appeared aimed at China, the report said emerging countries were unlikely to be able to resist upward pressure on their currencies by means of capital controls or intervention in money markets. “There may be no alternative to raising interest rates, allowing greater flexibility in exchange rates and reducing reliance on foreign exchange intervention,” the report said. The B.I.S. report was often critical of the banking industry, in tune with what seems to be growing frustration among central bankers toward financial institutions that engage in high-risk practices while resisting more oversight. “The crisis exposed deficiencies in the financial sector’s business model that had prevailed for several decades,” the settlements bank said. Financial institutions earned high profit only by leveraging “opaque and illiquid balance sheets,” the report said. “Their performance has been volatile at all times and subpar in periods of general stress.” Banks remain overly dependent on short-term funding, which can dry up abruptly in a crisis, the report warned. The Bank for International Settlements, which provides a platform for transactions among more than 50 central banks as well as a forum for debate, has been at the forefront of calls for new rules to restrain risky practices by banks and avoid future crises. Among other measures, the B.I.S. has called for changes to banker pay to remove incentives to make risky bets; more disclosure by banks of their holdings and trading activity; and wind-down procedures to prevent the failures of individual banks from taking down the whole system. The report said that banks faced the expiration during the next two years of $3 trillion in bonds that they have issued. The banks will have to pay sharply higher interest rates than before the financial crisis. “Banks that have trouble tapping new funding sources will have to shrink,” the report said. In a statement, Christian Noyer, chairman of the B.I.S. and governor of the Bank of France, also seemed to be signaling that it is time for governments to take the lead in restoring stability to the financial system. “Over the past two years policymakers worldwide, acting in close cooperation, have succeeded in containing the financial crisis,” he said in a statement. “The main tasks of the public sector now is to design policies that minimize the risks of future financial crises and promote sustainable growth.” Sewell Chan and Jackie Calmes contributed reporting from Toronto. -- Jim Devine "All science would be superfluous if the form of appearance of things directly coincided with their essence." -- KM _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
