US: Credit Market

G7 Leaders May Demand Overhaul of Bank Model


Some banks will have to adapt their business models under policy recommendations to be made to global financial leaders at the G7 meeting next week, Dutch central bank chief Nout Wellink said on Saturday.

The Group of Seven industrialized powers meets in Washington on April 11 to discuss a regulatory response to an eight-month old credit crunch that is crimping global economic growth.

"We will come with a long list -- a really long list -- of recommendations," said Wellink, who chairs the global Basel Committee on Banking Supervision, which is part of the Financial Stability Forum that coordinates the G7 regulatory response.

The financial-market turmoil began last year with defaults on U.S. home loans and rapidly spread through the financial system via complex credit-derivative products packaged, bought and sold by the world's major financial institutions.

"What we try to address is the underpinnings of the originate and distribute model. These underpinnings should be strengthened," Wellink said, speaking to reporters at the end of two days of meetings of European Union finance ministers and central bankers in Slovenia.

The "originate and distribute model" is the classic investment banking model of constructing packages of securities and selling them to a range of investors.

Many commercial banks have also moved from the traditional "buy and hold" model to originate and distribute where they distribute credit risk to other market players, often in the form of opaque securitized products.

Some of these securitized products were based on underlying home loans and became worthless when the loans defaulted.

Critics have said the originate and distribute model loosened the link between debtor and creditor and left banks with less of an incentive to look at the creditworthiness of the debtor.

Wellink said recommendations to the G7 -- the United States, Japan, Germany, Britain, France, Italy and Canada -- will also look at how to improve transparency in financial markets.

"We will address transparency issues. We will deal with the rating agencies. We will also pay attention to cooperation between supervisors and central banks," Wellink said.

Credit-rating agencies gave high ratings to many of the securitiZed products that are now without a market and, to all intents and purposes, essentially worthless.

Standard & Poor's, Moody's and Fitch, which dominate the ratings business, have suggested possible reforms to how they issue ratings but ministers in Slovenia signaled that more needs to be done if agencies are to avoid regulation.

Leaders Urge IMF to Develop Warning System

Separately, leaders from around the world on Saturday called for urgent reform of global financial institutions to prevent a recurrence of the credit crisis.

About a dozen leaders, brought together by Prime Minister Gordon Brown, issued a communique urging the International Monetary Fund to help develop an effective early warning system to guard against financial risks to the global economy.

Australian Prime Minister Kevin Rudd said the world had to learn the lessons from the credit crisis, sparked eight months ago by massive default on U.S. sub-prime mortgage debt.

"Too often in the past when these sorts of events have occurred ... the lessons are lost. The lessons must be learned and applied, otherwise we will face a very rocky future indeed," Rudd told a news conference after the "Progressive Governance" conference outside London.

Also in attendance were South African President Thabo Mbeki, New Zealand Prime Minister Helen Clark and Austrian Chancellor Alfred Gusenbauer, as well as the heads of the IMF, World Trade Organization, African Development Bank and Several UN agencies.

IMF Chief Offers Gloomy Global Outlook

IMF Managing Director Dominique Strauss-Kahn told the group gathered by Brown that most of the downside risks to the world economy feared six months ago had now become reality.

"The forecasts we are going to release in a few days are not really improving,'' Strauss-Kahn said of the IMF's twice-yearly World Economic Outlook, due out next week ahead of the IMF's spring meetings in Washington.

Earlier in the week, the IMF said it has cut its 2008 outlook for world economic growth for the second time this year. The IMF now expects global growth to slow to 3.7 percent this year, down from its January forecast of 4.1 percent and lower still from the 4.8 percent rate it predicted in October last year.

One bright spot among the discussions was talk of improving prospects for a breakthrough in the long-running talks on world trade liberalization.

"My feeling is that we are now reaching a stage where it (an agreement) could happen,'' WTO chief Pascal Lamy said.