G7 seeks to end market perversion: officials

By Brian Love and Paritosh Bansal

WASHINGTON (Reuters) - Financial market overhauls announced by the G7 industrial powers seek to rid the system of the "perverse incentives" that caused the current global crisis, senior policymakers said on Saturday.

But the battery of reform edicts announced by the G7 on the basis of a report by the Financial Stability Forum (FSF) are about making the capitalist system safer in the medium term rather than providing a quick fix, they said.

Mario Draghi, Italy's central bank chief and head of the FSF forum that proposed the reforms, said regulators and supervisors would move swiftly to strike a better balance in global finance between innovation and risk control.

"This report is a first step in the regulatory response," said Draghi, flanked at a news conference by other top-rank officials including U.S. Federal Reserve Vice Chairman Donald Kohn, Dutch central bank chief Nout Wellink and Timothy Geithner, head of the New York Federal Reserve.

"So the goal of the report is to recreate a financial system that's partly immune -- hopefully immune -- to these perverse incentives, where risks are correctly identified and managed, and third, where leverage is going to be less," he said.

Wellink said that the crisis that snowballed out of the U.S. sub-prime mortgage market last August was so far predicted to result in bank losses and writedowns of $450-500 billion.

Regulators and supervisors took some of the blame even if it was hard for anybody to keep up with the pace at which markets invented new things like the myriad, mortgage-backed securities and derivatives behind the latest market turmoil.

"We'd like to be a bit more aggressive in the future," on crisis prevention, said Wellink, head of another supervisory group called the Basel Committee on banking supervision.