Banks, regulators see no need for overhaul

WASHINGTON (Reuters) - Bankers and regulators are rarely of the same mind but at a weekend G7 meeting to discuss the global credit crisis they thought alike -- the world financial system is better than ever, but still doesn't work as it should.

The two sides have had a lot of explaining to do since the collapse of a relatively small section of the U.S. mortgage market briefly paralyzed global finance, sent credit markets reeling, and still threatens to dampen world economic growth.

At the G7 showdown -- with the world's mightiest central bankers and finance ministers looking on -- both parties agreed that bankers were, for the most part, to blame for the mess but that the regulatory framework was, for the most part, sound.

Both are now racing to devise solutions before the next summit in April of the Group of Seven major economies, with the bankers scurrying to get their own house in order before the regulators do it for them.

The result is likely to recognize that some financial innovation was really failed alchemy and that the permanent presence of active buyers and sellers in any market to provide liquidity cannot be taken for granted.

But all agree Basel II -- the new risk rulebook for global banks gradually coming into affect worldwide -- will largely address many of the risks that tripped up the financial wizards.

Basel II, named after the Swiss-based global regulatory group the Basel Committee on Banking Supervision, rewards safe banking practices and penalizes risky behavior with capital charges.

It took six years, to the end of 2004, to draft the enormously complex rulebook and will take at least another five to implement it -- too late to have prevented the current crisis but possibly in time to mitigate future strains.

VISIONARY

The Basel Committee chairman, Nout Wellink, is looking to tweak the document to tackle the liquidity issues that befuddled banks in August, when central banks like the Fed and the ECB poured emergency liquidity into the banking system to keep the wheels from freezing up completely.

The techniques banks used to hide risk under the old Basel accord will draw hefty capital charges under Basel II, leading many, including Wellink, to conjecture that the subprime crisis may not have occurred had the new regime been in place.

"Don't blame Basel II," told Reuters in an interview on Sunday. "One can't say (for sure but) if we would have implemented Basel II, the world would have been different."

Japan introduced the system in March this year, Europe goes live with Basel II's advanced risk rules in 2008 and the United States begins one year after.

Wellink, who in February pinpointed almost all the weak points in the financial system that failed six months later, does not believe in heavy-handed regulation. A fan of creativity and innovation, he believes that Basel II is sound.

"If the Wright brothers had needed a license to get up in the air, we would never have had airplanes," Wellink, the head of the Dutch national bank and a member of the governing council of the European Central Bank.

The high-speed crash in August is as much a witness to the strength of the banking sector as it is testimony to its weaknesses, said Wellink.

"The fact that it happened, this is a failure of the system but we could cope with that failure of the system partly because of the strength of the banking sector," he said.

The one permanent feature to the new financial system -- one that even Basel II may not eliminate -- is the breakneck pace of change in banking. Combined with the globalization of finance, that means more accidents on a global scale are inevitable.