ECB's Trichet says banks must own up to losses

By Pedro Nicolaci da Costa and Burton Frierson

NEW YORK (Reuters) - Global financial markets are in a period of high uncertainty that requires banks come clean with the extent of their losses as quickly as possible, European Central Bank President Jean-Claude Trichet said on Monday.

Trichet emphasized the need for global coordinated action, welcoming recommendations from the Group of Seven nations over the weekend that called for greater transparency and more pro-active regulatory oversight.

"The present turbulences have, once more, demonstrated that opacity as regards markets, financial instruments and real situations of financial institutions is a recipe for catastrophe," Trichet told a conference at New York University School of Law.

"Financial institutions should fully and promptly disclose their risk exposures, write-downs and fair-value estimates for complex and illiquid instruments in their upcoming mid-year reporting," he said. Trichet also called for more transparency on complex financial instruments such as credit derivatives.

The speech was unusual for the absence of any mention of inflation, the core of the ECB's mandate and a constant preoccupation for Trichet; although when pressed on the issue he did say it was "certainly a problem."

The ECB has been very active in pumping the financial system with liquidity in an effort to get frozen credit markets moving again. But unlike the U.S. Federal Reserve, it has been unwilling to slash interest rates for fear that price increases might get out of control.

Trichet said the seeds of the current crisis, which began last August, were sown well before the troubles in the U.S. mortgage market began spreading elsewhere.

He criticized what he called the "shadow banking system," meaning non-bank financial institutions, for taking risks based on the false premise that asset prices would continue rising indefinitely.

A lack of transparency in markets has led to herd behavior and indiscriminate risk-aversion, he added.

In an effort to address this, Trichet called for the rapid implementation of the G7's proposals. Longer-term, he said, better risk management and stress-testing, as well as improved credit ratings for structured products, are also needed.

"Expeditious and effective implementation is of the essence," he said.

PARTING WAYS

Pressed by reporters on the differing approaches of the Fed and the ECB, he said the two central banks face different circumstances, but that their missions had much in common.

"A solid anchoring of inflation expectations is of the essence," he said. "That's our responsibility as central bankers and I trust that we all have that in mind when we act."

The Fed has cut interest rates sharply since the start of the credit crisis, bringing its benchmark rate down to 2.25 percent from 5.25 percent. The ECB, in contrast, has held its policy rate steady at 4 percent.

(Reporting Pedro Nicolaci da Costa, Burton Frierson, Steven Johnson; Editing by Leslie Adler)