ANALYSIS-G7 banking proposals get lukewarm reception

By Walden Siew

NEW YORK (Reuters) - Plans by the Group of Seven leading industrial nations to avert future global financial market crises, announced on Friday, don't have the teeth to force immediate change at banks.

The recommendations, however, may be a blueprint for a coming struggle that pits top banking regulators against industry giants such as Deutsche Bank AG (DBKGn.DE), Citigroup (C.N) and Morgan Stanley (MS.N).

Policy-makers from the G7 nations met on Friday in Washington D.C. and announced wide-ranging recommendations for more bank regulation, enhanced bank capital requirements, and risk management tools, based on a report by a group of international regulators, the Financial Stability Forum.

While widely praised, all the advice is voluntary and comes at a time when banks' earnings and capital bases are being squeezed by the meltdown in the U.S. housing market, meaning they are unlikely to comply with additional requests.

Moreover, banks are already writing down the value of their riskiest assets and the current U.S. administration is averse to more regulation of the capital markets.

"We are not fools," Nout Wellink, head of the Basel Committee on Banking Supervision, told Reuters on Sunday. "We do realize there are better moments to introduce substantial increases in capital requirements."

While banks may resist calls to raise regulatory capital requirements, banking regulators "will go further in certain respects whether they like it or not," Wellink said.

For banks, the call for better capitalization and standardized valuation of structured debt comes after more than $200 billion in write downs of those assets thanks to the U.S. subprime mortgage market crisis.

100 DAYS

The G7's Financial Stability Forum report set a 100-day deadline for implementation of some of the recommendations.

"The 100-day deadline is a mirage which will quietly disappear the closer we get to that date," said Mirko Mikelic, a portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan.

Mikelic said the Federal Reserve will step up and provide liquidity if necessary for the U.S. system as well as be the backstop for any collapse of any major U.S. financial institution.

"The question is what if a European bank with strong links to the global financial system goes under," he said.

Others agreed that most of the recommendations will have a longer-term impact.

"This is longer-term stuff, but in light of the crisis we're going through now, it's desirable to be taking stock," said Peter Hooper, chief U.S. economist at Deutsche Bank AG in New York. "No one was expecting any significant breakthrough. There was a modicum of disappointment for those holding out for a surprise."