Trichet Says Global Banks Must Manage Risks Better

Trichet Says Global Banks Must Manage Risks Better

Jan. 11 (AFP) European Central Bank President Jean-Claude Trichet, speaking on behalf of the world’s central bankers, said financial institutions must improve their risk management after a crisis that pushed the global economy into its worst recession in more than six decades.

“We have to get risk management very significantly improved by market participants and financial institutions,” Trichet said at a briefing at the Bank for International Settlements in Basel, Switzerland, today, after chairing the so- called Global Economy Meeting. “That’s something of the essence.”

Policy makers are concerned about excessive risk taking, which led to the credit bust of 2007 and prompted central banks to take unprecedented measures. Officials have reduced interest rates to record lows and flooded markets with cash to fight the financial crisis and revive lending. Trichet said today that the global economy is in a “recovery mode.”

“Obviously asset prices are something that central banks should keep an eye on,” said Laurent Bilke, a former ECB economist now at Nomura International Plc in London. “There are certainly risks associated with what could happen if central banks take too long to exit from the special measures.”

Stocks, Commodities Rally

Markets are rediscovering their appetite for risk after central-bank efforts helped to pull the global economy out of recession. The U.S. Federal Reserve has cut its benchmark rate to almost zero and added more than $1 trillion of assets to its balance sheet to combat the credit freeze, while Japan’s benchmark is also near zero. The ECB’s main rate is a record-low 1 percent.

The MSCI World Index has surged about 75 percent from its low of the year on March 9. Copper has more than doubled in the last 12 months and crude oil rose to a 15-month high of $83.95 a barrel today.

Trichet met in Basel with his counterparts from the world’s largest central banks, including China’s Zhou Xiaochuan and Fed Chairman Ben S. Bernanke.

While policy makers met with executives from financial institutions including Deutsche Bank AG Chief Executive Officer Josef Ackermann at the weekend, Trichet declined to comment today on those talks.

“We’re working very actively on this domain,” he said, referring to the improvement of risk management at financial institutions. “We have to make sure everybody gets the message.”

‘Resilience’

Trichet said that at the “global level there is a confirmation of the progressive normalization of the economy.” Emerging economies “demonstrated resilience” during the recession and are “very, very clearly in a more dynamic mode now,” he said.

The ECB President said his remarks shouldn’t be “interpreted” in relation to future monetary policy decisions. The ECB’s governing council holds its next policy meeting in Frankfurt on Jan. 14.

The Washington-based International Monetary Fund may raise its 3.1 percent forecast for 2010 global growth later this month, Deputy Managing Director John Lipsky said on Jan. 6.

“We are all looking very, very carefully to what happens, to credit dynamics and we exchange views on that,” Trichet said. “Our aim is to eliminate as much as possible any supply constraint for credit allocation.”

Banks’ Reluctance

The global recession has made banks reluctant to lend and also eroded demand for credit. Growth is likely to remain muted unless credit flows improve and companies and households increase spending.

“What they want is for banks to lend,” said James Nixon, co-chief European economist at Societe Generale SA in London. “The fact that banks are making large profits at the moment doesn’t tell you anything about their risk management.”

In a statement issued separately today, the oversight panel of the Basel Committee on Banking Supervision, which Trichet also chairs, backed a plan to carry out an “extensive consultation and comprehensive assessment” of how its proposed regulatory changes would impact both financial companies and the economy.

The regulators are discussing increasing capital buffers and introducing liquidity standards with the intention of having calibrated a final set of capital rules by the end of the year, the statement said.

“Timely completion of the Basel Committee reform programme is critical to achieving a more resilient banking system that can support sound economic growth over the long term,” Trichet said.

AFP