Investors Scrutinizing the Regulators

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Warning System

Time to clean house, say bankers


Duncan Mavin


Friday, July 18, 2008

A group of the world's top bankers yesterday admitted the industry was to blame for the current crisis and called on the sector to clean house following the global credit crunch. The bankers also said they will set up a squad of crack industry veterans tasked with warning regulators, central banks and the media about similar problems in the future.

"There were serious weaknesses in the business practices of a number of firms," said Dr. Josef Ackermann, the chairman of Deutsche Bank AG, who heads the Institute of International Finance. "It is essential for the industry to reform."

Dr. Ackermann was speaking in Washington after the IIF released the final version of its report on market best practices, which includes proposals intended to strengthen the financial-services industry after a year of setbacks. Banks around the world have written off about $400-billion since the credit crunch was sparked by fears about the U. S. sub-prime mortgage market, and a number of banks in the U. S. and Europe have gone to the wall.

One of the IIF's key recommendations is that a group of 15 to 20 experienced bankers, including prominent participants of "the highest distinction," will meet two or three times a year to act as an early-warning system on emerging issues.

Rick Waugh, chief executive of Bank of Nova Scotia -- who chaired the committee responsible for the best-practices report -- said the new "Market Monitoring Group" would not have enforcement powers but it will be in the self-interest of firms to act on its recommendations.

"If you know something is going on, you can take action. But if you don't know, that's when you've got problems," Mr. Waugh said in an interview.

"[During the current crisis,] some banks have not suffered greatly, but some have. The successful firms are the ones with best practices."

Mr. Waugh said he will be instrumental in setting up the monitoring group, although he is not sure whether he will be among its members. After the release of a draft version of the report earlier this year, the IIF was criticized in some quarters for appearing to reject calls for greater regulation of the sector. But Dr. Ackermann said more regulation would be needed.

"This report is not intended to be an exercise in self-regulation," he said. "We recognize that it is essential for the industry to reform and that there is an emerging consensus on the benefits of reinforcing these efforts through effective regulatory incentives and structures."

Dr. Ackermann called the new monitoring group "a major initiative," and said, "It is clear that timely warnings about possible future weaknesses or declining standards will have to be given a higher priority going forward."

The IIF, which represents about 380 financial-services firms around the world, set up the best-practices committee in November and has met with more than 70 banks, and more than 100 CEOs and chief risk officers. Its report also includes recommendations on compensation, risk management, the use of credit-rating agencies and disclosure issues.

The early draft of the report was also controversial because of its apparent criticism of fair-value accounting, which some bankers blame for exacerbating the recent crisis. That position led Goldman Sachs to threaten to withdraw its membership from the IIF. In the final report, the bankers stop short of denouncing fair-value accounting but welcome recent moves by accounting standard setters to revisit valuation issues.

Meanwhile, Scotiabank's Mr. Waugh acknowledged the sector "as a whole needs to do much better" and also said chairing the committee had been a challenge.

Producing the report was "like peeling back an onion" because new issues have been emerging as the committee went about its work, he added.

"The real proof of the committee's success is hopefully in the future we will not have the degree of crisis that we have had this time," Mr. Waugh said. "There will be other crises, but hopefully risk management and all these things will be improved."