U.S., Europe Warn of Further `Bad News;' Strengthen Regulation
By Gonzalo Vina and Alison Fitzgerald
Finance chiefs from the U.S. and Europe said the eight-month credit squeeze is still festering and urged banks to take steps to relieve it.
``The chain of bad news may not have come to an end,'' Italian Finance Minister Tommaso Padoa-Schioppa said yesterday as the International Monetary Fund held its semi-annual meetings in Washington.
The collapse of the U.S. subprime-mortgage market led to a seizing up in capital markets and has triggered $245 billion in asset writedowns and losses since the start of 2007. Finance ministers and central bankers from the Group of Seven are trying to strengthen market regulation and want banks to speed disclosure of losses and improve the way they value assets.
``The market is still adjusting, the turmoil has not yet settled down,'' Federal Reserve Vice Chairman Donald Kohn told reporters in Washington. ``It's still a fragile situation out there.''
The G-7 on April 11 endorsed proposals by the Basel, Switzerland-based Financial Stability Forum to impose tougher oversight on financial markets. The cost of borrowing in euros and dollars for three months was still at the highest since December in the past week.
New York Fed President Timothy Geithner indicated that regulators may have relied too much on financial companies and investors to police themselves.
``What we have to do is find a better balance between market discipline and regulation,'' Geithner said. ``I don't think anybody can look at the system and say we got that balance right.''
By the end of July, the G-7 wants financial companies to ``fully'' disclose in mid-year earnings reports their investments that are at risk of loss. Firms should also establish ``fair-value estimates'' for the complex assets that investors have shunned and boost their capital as needed, the G- 7 said.
Regulators must revise liquidity risk management rules, improve accounting standards for off-balance-sheet units and enhance guidance on how assets are fairly valued, the group said. International panels of supervisors will also be formed by the end of this year for each of the largest global financial companies.
The investor exodus from securities linked to subprime U.S. mortgages caused the credit crisis that began in August, and led to the collapse of Bear Stearns Cos. last month. Credit markets remain ``substantially impaired,'' Geithner said April 3.
``March was a very, very tough month,'' Lehman Brothers Holdings Inc. Chief Financial Officer Erin Callan said in a Bloomberg Television interview last week. General Electric Co. Chief Executive Officer Jeff Immelt said ``the last two weeks in March were a different world in financial services.''
While urging stronger supervision, officials agreed that they still won't be able to eliminate the chance of another financial crisis.
``I don't think we can prevent the kinds of waves of optimism and pessimism that pass over the market,'' Kohn said. ``There will be future events. Our role as regulators is to try to make the system more resilient.''
Geithner said the goal is to make the system more resilient and have financial institutions with better ``cushions'' and ``shock absorbers'' in place to weather crises.
``If we could figure out a way to have on our desks a screen that gave us the capacity to predict financial crises of this magnitude, we would do it in a second,'' Geithner said. ``It's a good thing to work on, but it's very hard to do.''
The G-7 officials dined April 11 with chief executive officers from banks including Deutsche Bank AG, Credit Suisse Group and Lehman Brothers Holdings Inc.
Bank of Italy Governor Mario Draghi, who chairs the Financial Stability Forum, said the response of banks to the report had been ``possibly favorable,'' while acknowledging the 100-day deadline for action is a ``tight one.'' ECB council member Nout Wellink said banks had been constructive in reacting to the report.
Wellink said the reason it's hard to foresee financial crises is that ``innovation has outpaced risk management, supervision and regulation.''