US: Credit Market

Banks Launch Reform Drive in Wake of Credit Crisis


The world's top banking lobby on Sunday accepted responsibility for the U.S. subprime lending crisis and launched a broad reform program designed to mend cracks in ailing credit markets.

"We take responsibility," said Josef Ackermann, chairman of the Institute of International Finance, or IIF, the lobby which rallies over 375 of the world's biggest banks and financial firms.

The Washington-based IIF laid out a roadmap to establish standards in the financial industry by early 2008 to address the systemic weaknesses that triggered the crisis.

The IIF plan pits the world's biggest banks in a race against regulators who, under the G7-led Financial Stability Forum (FSF), also aim to devise prescriptions for the banking industry designed to shore up weakness that led to the crisis.

At the weekend, G7 leaders meeting in Washington signed off on the FSF's analysis of the credit crisis and urged the global regulatory committee to propose solutions by the next G7 meeting in April.

"Nobody at this table or at the board is pointing fingers at regulators or ratings agencies," said William Rhodes, senior vice chairman of Citigroup and vice-chairman of the IIF. "This is our responsibility."

Withholding Judgment

The reform effort comes as U.S. banks and finance officials struggle to rally support for an $80 billion debt rescue fund launched by Bank of America , Citigroup and JPMorgan Chase .

The fund aims to pool ailing assets and resell them in an effort to prevent the dumping of billions of dollars of bonds within Structured Investment Vehicles, or SIVs, that are linked to subprime mortgages and other debt.

Ackermann, chief executive of Deutsche Bank , refrained from giving the fund the IIF's full blessing.

"It is, in our view, very, very difficult yet and probably premature to make a firm judgment, as not all the details are known or fully announced," he said. "But in general...we welcome market initiatives aimed at accelerating the restoration of confidence and liquidity in credit markets".

Indeed, Ackermann advised financial actors burdnened with illiquid assets to write down their value now while the financial sector was strong and not to drag any uncertainty that has made banks become fearful to lend to one another.

"If we mark them down now and take the hits we provide transparency ... and get out strongly without jeopardising the financial system as a whole," he said.

Some bankers have criticised the U.S. fund rescue plan as inappropriate because it risked dragging out problems instead of tackling them head-on.

The Plan

The IIF will aim to spell out standards for risk

management, credit underwriting and pricing and will tackle the sticky issue of off-balance sheet risk through so-called conduits. The group will also aim to identify how banks should manage the types of liquidity risks they have faced in recent months.

The set of principles will also look into valuation issues, the use of ratings, transparency and disclosure.

This is the first time in its 25-year history that the IIF -- created as an advisory and lobbying group in the wake of the Latin American debt crises of the 1980s -- is turning the critical reform spotlight on itself.

The problems in the U.S. subprime mortgage market, which has seen a wave of foreclosures, spread quickly worldwide because the loans were packaged into complex financial securities and resold to investors.

The turmoil triggered a tightening of credit conditions in August, prompting central banks around the world to respond with massive injections of liquidity to ensure the global financial system did not freeze up.