Regulators should improve accounting rules and scrutinize banks’ risk controls to limit any damage to financial systems caused by wrong bets on derivatives, US, European and Chinese bankers said at the Boao Forum for Asia.
There are “shortcomings” in international accounting rules, such as the so-called “mark-to-market” rules that require companies to state the latest carrying value of their assets, said Liu Mingkang (劉明康), chairman of the China Banking Regulatory Commission.
“It’s our duty to identify the shortcomings, gaps in regulations and oversight,” Liu said yesterday at the forum in southern China’s Hainan province. “Financial institutions and regulators must rebuild confidence and very urgently increase transparency. It’s not only something market participants should do, it also falls on the shoulders of the regulators.”
Liu’s comments reflect a growing concern among regulators trying to limit damage to their banks and financial systems from wrong bets on derivatives.
The UK government nationalized Northern Rock Plc in February after it ran out of funds following the US subprime crisis, the US Federal Reserve provided financial support for JPMorgan Chase & Co’s takeover of Bear Stearns Cos. while European Union finance ministers last week announced a plan to strengthen oversight.
“The pendulum always goes backwards and forwards,” said Leon Brittan, a vice chairman of UBS AG, which wrote down almost US$38 billion after a wrong bet on mortgage securities at the peak of the US housing market. “The pressure is always on freeing things up and over regulation,” he told the forum, a three-day conference for business and political leaders modeled on the World Economic Forum in Davos, Switzerland.
At least 34 EU-based banks have racked up about US$62 billion of writedowns and US$10 billion of credit losses, Bloomberg data shows. That includes London-based HSBC Holdings Plc with US$12.4 billion, Dusseldorf-based IKB Deutsche Industriebank AG with US$9 billion and Deutsche Bank AG, also of Germany, with US$7.4 billion.
“That’s it, based on the current markets, which cannot be predicted,” Brittan said, commenting on the writedowns by Europe’s largest bank. “Anyone who goes beyond that is a fool.”
Bear Stearns was forced to sell itself to JPMorgan because customers and lenders fled on speculation that the company faced a cash shortage. The New York Federal Reserve Bank set up an overnight-loan mechanism for government bond dealers after JPMorgan stepped in to buy Bear Stearns on March 16. As of March 21, Bear Stearns borrowed US$32.5 billion from the New York Fed and another US$13.4 billion from JPMorgan.
“One has to consider the costs of saving a financial institution versus the costs of not saving it,” said Merrill Lynch Asia Pacific Ltd’s managing director Damian Chunilal, speaking at the same Boao forum. “In the case of Bear Stearns and Northern Rock in Britain, the feeling was rightly or wrongly, these institutions were very central to the overall financial system.”
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