IMF says beware of knee-jerk subprime rules

By Thomas Atkins

WASHINGTON (Reuters) - Greed may have played a bigger role than lax regulation in the subprime crisis and supervisors should be wary of slapping new rules on banks in a knee-jerk response, a senior IMF official said.

The biggest risk facing economies hit by the crisis is that banks will overreact and restrict lending in a way that would threaten to choke off economic growth, said Jonathan Fiechter, deputy director of the monetary and capital markets department of the International Monetary Fund.

"We've had major credit crunches in this country after this kind of phenomenon and not surprisingly, surveys show that banks are increasing their underwriting standards," Fiechter told Reuters. "You have to resist the overreaction."

Fiechter's comments come one day after central bankers and finance officials from G7 industrialized countries approved a broad reform outline that called on banks to improve stress-testing and fortify access to funding in times of trouble. The G7 avoided calls for a sweeping overhaul.

"We don't need a quick knee-jerk reaction because the financial markets have become so complex that we want to avoid the law of unintended consequences," he said.

Leading up to the subprime meltdown, investors devoured complex, engineered assets in their hunger for profit, many of them ignoring the risks, he said.

"We still have problems with greed, problems with incentives, problems with poor underwriting," he said. "There are people out there buying assets who have no idea what they are buying."

"There is a risk that the complexity of the instruments has gotten way beyond the ability of all but very few people to understand them."