G7 readies response to market crisis

By Glenn Somerville and Brian Love

WASHINGTON/PARIS (Reuters) - The Group of Seven economic powers are likely to deploy an international team to keep closer tabs on the world's big banks and demand better risk management and information disclosure across financial markets.

Finance ministers from the G7 countries have also invited leading bank chiefs to discuss the global markets crisis, which could cost close to $1 trillion in losses and downgrades in the value of toxic assets accrued over years of investor euphoria.

The moves to improve the behavior of banks and supervision of financial markets are due to be announced at a G7 meeting on Friday in Washington. They are based on recommendations from the Financial Stability Forum, a body the G7 created in response to the Asian financial crises of the late 1990s.

Among FSF ideas, relayed by U.S. Treasury and other G7 officials, is the creation by the end of this year of a team of supervisors to jointly watch over the biggest global banks.

"I expect the recommendations of the FSF, perhaps amended somewhat, will be adopted by the ministers and central bankers," Canadian Finance Minister Jim Flaherty said.

Officials from the G7 -- the United States, Japan, Germany, France, Britain, Italy and Canada -- will likely stop short of endorsing any publicly funded rescue of the troubled U.S. housing market, a point underscored by the U.S. Treasury's undersecretary for international affairs, David McCormick.

"We think a very significant injection of public funding that essentially bails out speculators would not be a good use of taxpayer money and is frankly not something that we sense most Americans would support," McCormick said.

HEAL THYSELF

As details of the G7 plan emerged, so did news that German regulators had ordered the closure of a small bank that blamed its downfall on the credit crunch. The crisis struck in August as a defaults crisis in the U.S. mortgage market snowballed.

If implemented, the plan should "minimize the possibility that the challenges we've faced will reoccur," Treasury's McCormick told The Wall Street Journal.

Among other proposals, the FSF is calling on supervisors to improve their guidelines for the way banks plan for cash shortages by July.

It also recommends that international regulators require banks keep more capital on hand to protect against failures of complex securities and off-balance-sheet investments, and calls for banks and securities firms to publicize the risks they face from complex securities.

For its part, a lobby for the banks and broader finance industry said it wanted to pursue a voluntary code of better business practice, including better stress-testing and tougher controls to prevent rogue trading.

The Institute of International Finance presented the ideas in a report in Frankfurt in which it also said pressure to value assets according to so-called mark-to-market methods was making a bad situation worse.

Crisis response efforts are certain to be the top topic on Friday, not only when G7 finance ministers and central bankers get together for afternoon talks, but in the "outreach dinner" that follows with top bankers.