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Pressuring Europe's banks

Leaders seek greater transparency in the financial system, either voluntarily or by force, to clarify investor risk.

January 30, 2008|Kim Murphy | Times Staff Writer

LONDON — European leaders called Tuesday for expanded transparency in the banking system to make the risks in complicated investment vehicles and troubled loan portfolios clearer to investors and shareholders.

Failure by the banking system to step forward would result in more regulation to force them to do so, the leaders of Britain, France, Germany, Italy and the European Commission warned at a summit in London.

They also called on the International Monetary Fund and other international banking organizations to help develop a financial "early warning system" for impending financial troubles and to consider strengthening the IMF's responsibility to "oversee macrofinancial stability" across national boundaries.

"The message is, if you do not comply with this, then we need to resort to regulatory measures," German Chancellor Angela Merkel said at a news conference with the other European leaders, who had gathered to develop a European strategy to counter the turmoil in the global markets ahead of a meeting of Group of 8 finance ministers in Tokyo next week.

"What we are calling for is enhanced transparency of the world financial system. . . . We cannot accept that this lack of transparency should jeopardize the growth that we need in order to create the jobs that we need for our fellow citizens," French President Nicolas Sarkozy said. "We want the sort of capitalism that encourages entrepreneurship, not speculation."

The summit comes after several weeks of volatility in the European markets, as in others around the world, and amid worldwide fallout from the U.S. sub-prime mortgage crisis. The mortgage problems led to a cash crisis last year at Britain's Northern Rock bank and the first run on deposits at a British bank in 140 years.

France, meanwhile, was reeling Tuesday from new revelations surrounding risky trades by an employee at Societe Generale that cost the bank $7.2 billion. That's on top of billions in losses related to mortgage-backed securities.

Testimony to investigators from trader Jerome Kerviel, reported in the newspaper Le Monde, suggested that he believed his superiors knew about his transactions but didn't act to stop him.

"I can't believe that my superiors were not aware of the amounts I was committing; it's impossible to generate such profits with small positions, which leads me to say that when I'm in the black, my superiors close their eyes about the methods and volumes committed," Kerviel reportedly said.

Nevertheless, shares of Societe Generale soared 10% amid reports that BNP Paribas, France's biggest bank in terms of assets, was holding preliminary internal discussions about a possible takeover.

Britain's Financial Services Authority, which regulates the banking and insurance industry, warned this week of a "less benign economic outlook" for 2008, including financial problems brought on by high levels of borrowing among "a significant minority of consumers," more financial crime and a strain on some financial institutions' business models as a result of adverse market conditions.

But agency spokesman Robin Gordon-Walker, in a meeting with foreign journalists Tuesday in London, said British authorities would resist moving to the kind of "rules-based" regulation the U.S. adopted in the wake of the crisis at Enron Corp. and would maintain the current system, which relies on a set of basic principles of market conduct.

"Rules tend to be always catching up with the last crisis," he said. "This should not be a trigger to move away from a principle-based regime, which we think is better than piling up lots and lots of rules which might be accepted in the letter but don't necessarily prevent a situation arising."

The agency was expected to publish its proposals today for avoiding bank failures and allowing the government to step in quickly if failures occur. Unlike the U.S., Britain has no federal depositor insurance guarantee enshrined in law, but the British treasury has advanced about $50 billion to help Northern Rock out of the current crisis.

In their communique, European leaders emphasized the need to leave primary responsibility for managing risk with individual financial institutions and investors, "backed up by strengthened national regulatory and supervisory frameworks" and stepped-up EU and international cooperation.

They called for putting more information in credit ratings to increase understanding of the risks associated with certain investments, and for audit firms and supervisors to help shed light on banks' exposure to off-balance-sheet vehicles, with banks providing "prompt and full disclosure of losses."


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