April 9, 2008 / 10:20 AM / 11 years ago

G7 readies response to market crisis

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.

G7 finance ministers (front row) and central bank governors (back row) gather for a group picture during meetings at the U.S. Treasury Department in Washington October 19, 2007. Front row (L-R): Canadian Finance Minister Jim Flaherty, French Finance Minister Christine Lagarde, German Finance Minister Peer Steinbrueck, U.S. Treasury Secretary Henry Paulson, Italy's Finance Minister Tommaso Padoa-Schioppa, Japan's Finance Minister Fukushiro Nukaga, British Chancellor of the Exchequer Alistair Darling and Jean-Claude Juncker, Luxembourg's prime minister and chairman of the Eurogroup. Back row (L-R): IMF Managing Director of the International Monetary Fund Rodrigo de Rato, Bank of Canada Governor David A. Dodge, Bank of France Governor Christian Noyer, German Bundesbank President Axel Weber, Federal Reserve Chairman Ben Bernanke, Bank of Italy Governor Mario Draghi, Bank of Japan Governor Toshihiko Fukui, Bank of England Governor Mervyn King, European Central Bank President Jean-Claude Trichet and World Bank President Robert Zoellick. REUTERS/Jason Reed

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.


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.

Deutsche Bank Chief Executive Josef Ackermann, who also chairs the IIF, will be among the attendees. Executives from Mizuho Corporate Bank and Citigroup are also among the 10 or so bankers expected to attend.


Major banks have announced tens of billions of dollars in losses and write-downs in recent months because of exposure to the U.S. subprime market or mortgage-backed debt derivatives which blossomed during a credit boom in the past five years.

The U.S. central bank was forced to orchestrate a takeover of Wall Street investment bank Bear Stearns Cos last month.

Germany announced its first fatality on Wednesday. Financial watchdog BaFin said it had suspended operations of a small investment bank, Weserbank, and asked a court to start insolvency proceedings after the bank was unable to cover operating costs.

The tightening of credit conditions is undercutting global growth. The International Monetary Fund cut its global growth forecast and said it expected the U.S. economy to tip into a mild recession this year.

A U.S. official joined Europeans in criticizing the IMF for sharply downgrading its forecast. Treasury’s McCormick called the IMF’s outlook “unduly pessimistic.”

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