G7 seeks to end market perversion: officials

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.

"We have to find a better balance between market discipline and regulation in our financial system, a better balance between efficiency and innovation and reserves and stability," said the New York Fed's Geithner.

Finance ministers and central bankers of the Group of Seven powers announced an action plan on Friday, urging banks to come clean quickly and clearly on losses incurred since the credit boom of recent years went belly-up and proposed other steps including increases in capital provisions for risk.

"We call them, with a gentle word, recommendations. Some of them are (actually) policy decisions," Draghi told a news conference.

Officials said the situation in markets remained very fragile, and that the extent of losses banks may face as mortgage-related securities they hold turn sour is still unknown.

"The market is still adjusting, the turmoil has not settled down yet. Estimates of what these losses will be will depend on what happens to the U.S. housing market," Kohn said.

The FSF, a grouping of central bankers and regulators set up by the G7 in the wake of the Asian financial crisis in the 1990s, offered dozens of recommendations on how to shore up banking oversight and regulatory cooperation.

"I don't think we can prevent the kinds of waves of optimism and pessimism that pass over the market," he said.

"There will be future events. I think our role as regulators is to try and make the system more resilient so that when these events occur the effects on the economy and the financial markets more generally are muted.

As for the current turmoil, Kohn said: "It's not over yet."

(Writing by Brian Love, additional reporting by David Lawder)