FSB's Draghi says not time to pause on regulation

BASEL, Switzerland (Reuters) - Policymakers should continue pushing to make financial markets more resilient as there were still signs of fragility, Financial Stability Board Chairman Mario Draghi said on Saturday.

Some regulators have expressed concern there could be a temptation to ease efforts to beef up rules as "green shoots" of economic recovery appear.

Banks are also showing signs of returning to aggressive hiring and big bonuses, raising fears that lessons from the worst market crisis since the Great Depression are not being learnt.

"I don't think we are losing momentum...It's not time for pausing," Draghi told a news conference after the FSB's inaugural meeting.

Policymakers also needed to plan and coordinate their strategy to reverse measures taken to ease the pain of recession, such as huge liquidity injections and public stakes in banks, although it was not the time yet to implement them.

"Exit strategies ought to be credible. To be credible you have to have both the banking system repaired before you start to tighten monetary policy and you want the economy showing convincing signs of a sustained recovery," Draghi said.

American banks have raised large sums privately after depending on public money to stay afloat but the process of restructuring balance sheets generally was not yet complete.

Bank lending and securitization were still not strong enough to support a sustained economic recovery, Draghi added.

"We are not out of the woods yet," he said.

The FSB was set up by the G20 group of industrialized and emerging market countries in April to forge a consistent, global response to applying lessons from the credit crunch.

"We welcome the very significant progress we have achieved since April," Draghi said.

"A lot has been done to reassure markets that we would not view any systemic failure of the sort we saw with Lehman repeat itself," Draghi said.

The investment bank was allowed to collapse last September, sparking a near meltdown in financial markets.

The London Investment Banking Association, Japan Securities Dealers Association, Securities Industry and Financial Markets Association, and Investment Industry Association of Canada told the FSB on Friday that poor government coordination risked creating "regulatory arbitrage" and could curb capital flows.

Britain is adopting bank liquidity rules ahead of other countries, the EU has new rules on credit rating agencies without coordinating with other countries and is pushing ahead on hedge funds, the associations said.

"Where the FSB identifies practices that do not enhance sound regulation, promote integrity in financial markets or reinforce international cooperation, the FSB should encourage corrective action in line with the G20 mandate," they said.

Draghi said there was a need for consistency in areas such as credit rating agencies and convergence in accounting standards and also singled out hedge funds.

"The danger is each jurisdiction could go its own way and then we will have regulation prone to regulatory arbitrage," Draghi said.

"We hope that regulation... should not become a reason for renationalisation of capital markets," said Draghi, who is also a governing council member of the European Central Bank and governor of the Bank of Italy.

(Additional reporting by Tamora Vidaillet; editing by Sue Thomas)