Don't overreact to credit turmoil, bank group says

By Emily Kaiser

WASHINGTON (Reuters) - World finance ministers and central bankers should examine what went wrong in the recent financial market turmoil, but avoid rushing into tighter regulation, a global banking association said on Thursday.

When policy-makers gather here next week for International Monetary Fund meetings, they need to take a close look at lax lending standards, risk management, and the role of credit rating agencies, said the Institute of International Finance, which represents more than 360 private-sector banks.

The private sector must also take responsibility for its role in the credit crisis, the group said in a letter to Tommaso Padoa-Schioppa, who chairs the IMF's policy-setting International Monetary and Financial Committee.

"It is important that the IMFC at its forthcoming meeting take actions to solidify the restoration of confidence among consumers, businesses and investors," IIF managing director Charles Dallara wrote.

"Leading financial services firms recognize that they shoulder key responsibilities, and they are committed to taking needed actions to strengthen business practices and risk management in cooperation with official bodies."

The IIF said central banks need to clarify how and when they will step in as lenders of last resort in times of crisis, and expand the range of acceptable collateral. They may also need to consider better coordination when they inject liquidity into strained financial markets.

The U.S. Federal Reserve and European Central Bank have poured hundreds of billions of dollars into financial markets since August as credit problems that began with rising defaults in the U.S. subprime mortgage market quickly spread into other forms of debt around the globe.

Uncertainty over which banks were exposed to bad loans prompted lenders to pull back, exacerbating the credit crunch. The IIF said the situation highlighted the need for greater transparency, but cautioned policy-makers not to overreact.

"It would indeed be unfortunate if the result of the market strains in the last few months was a swing of the pendulum into the arena of overregulation," Dallara said at a news conference. "The last thing we need is a blanket which stifles innovation in financial markets."

With credit markets showing tentative signs of recovery in the past few weeks, the IIF said central banks need to strike "a delicate balance now between enabling continued steady global growth and keeping inflation, and inflation expectations, under firm control."

The IMF holds its annual meetings October 20-22.