Senior bankers call for loans shakeup

Date: Monday, October 22, 2007
Author: Larry Elliott, The Guardian

The world's leading private sector bankers last night called for sweeping reforms to address problems exposed by this summer's crisis in credit markets in an effort to restore investor trust and confidence.

The group said there needed to be more transparency in the $75bn asset-backed superfund if it was to achieve its aim of restoring confidence in the market.

Admitting that there was significant scope for improvement, the Institute of International Finance outlined a five-point blueprint to prevent a recurrence of the problems triggered by defaults in US sub-prime mortgages.

Joseph Ackermann, chairman of the IIF and Deutsche Bank, said: "It is now clear that a number of structural problems have raised issues that need to be addressed not only but primarily by the financial industry to follow through on the immediate corrective measures that many institutions have already started to implement."

He said the IIF was launching a "major initiative" to refine best practice when dealing with the complex structured products that were at the root of the freezing up of credit markets in August.

Mr Ackermann said the industry needed to improve its risk management, review the role of off-balance sheet conduits and special investment vehicles, find better ways to value complex products, look at the role of credit rating agencies and improve its transparency.

He admitted that some risks had not been adequately priced and the industry had struggled to value derivatives products based on sub-prime mortgages. "We saw how the sharp spike in sub-prime mortgage delinquencies dried up the market for sub-prime linked and then other structured products. Sharply eroding prices made them difficult to value given thin or non-existent quotations."

Mr Ackermann stressed the need for "proper valuations". He believed that despite the "serious strains in segments of credit markets, we do have fundamentally strong financial firms operating in a fundamentally sound financial system".

During the crisis, many financial institutions were unwilling to lend to each other and there was an aversion to certain types of investments. Mr Ackermann said the work to remedy vulnerabilities exposed by the crisis would help to "advance the restoration of trust among financial institutions and between the financial community and our customers".

Bill Rhodes, the IIF's vice chairman and president of Citibank, said he had repeatedly warned of the "high probability of dislocations in financial markets. We at the IIF have repeatedly argued that the reach for yield by investors, inadequate spreads, the lack of attention to fundamentals and the need for differentiation in the marketplace, posed serious risks."

Mr Rhodes added that the IIF could not rule out an even more severe slowdown in the leading industrial economies stemming from the possibility that the slump in American house prices - with the number of repossessions, known as foreclosures in the US, hitting a record high - would spill over into weaker consumer spending. There were also risks from a crash in emerging market economies, rising inflation and a "disorderly unwinding of the global imbalances."

With the mood in financial markets still nervous, Barclays and Royal Bank of Scotland have joined other banks by lining up a $30bn facility from the Federal Reserve to rescue customers with short-term liquidity problems. That follows similar deals arranged between the Fed and international banks including Citigroup, Bank of America, JPMorgan Chase and Deutsche Bank.

"Major banks such as ourselves... are encouraged by the Fed to have this kind of facility in place. That's what we have done," an RBS spokeswoman said, adding the bank had no intention of using the facility.