MercoPress. South Atlantic News Agency

Bankers acknowledge “weakness in business practices”

The credit crisis is still sending shockwaves around the world and leading banks have now accepted much of the blame for the current turbulence in the financial markets. At a meeting of the Institute of International Finance in Frankfurt, senior bankers acknowledged that “weaknesses in business practices”, including bankers' pay and the management of risk, may have contributed to the crisis, reports the BBC.

The global bankers' association, which represents more than 375 of the world's biggest financial companies, said banks must improve their risk management, disclosure and compensation practices to help prevent a repeat of the current crisis. The IIF said that while pay should remain the responsibility of the chief executive and senior management of individual banks, there should be greater deferral of bonuses and pay should be set on a "risk-adjusted basis". This means more closely aligning a bank's cost of capital, not simply its revenues, with shareholders' interests. The IIF's interim report on Market Best Practices recommends a series of measures which could be taken by banks - to be monitored by a code of conduct for better self-regulation of the industry in the future and more disclosure. The report says many firms need to improve their risk management, liquidity management and conduit underwriting in order to help restore confidence. "We need more transparency," Richard Waugh, chief executive of Scotiabank, said in reaction to the report. He believes senior managers should build a robust risk management culture in firms. "It is essential that firms introduce processes, if they do not already have them, to ensure that senior managements adopt and periodically affirm their firm's risk appetite." But, controversially, the IIF rejected suggestions that further regulation is needed. "We are resolved to do our utmost to clean our houses first and not leave it to the regulators to do that for us," said Josef Ackermann, the chairman of the board of the IIF and head of Deutsche Bank. Dr Ackermann said the industry has undergone "dramatic changes" in recent years including globalization and the growth of structured products that have spread risk but they have not improved stability. "We are trying to prevent a jump to premature regulations which we saw in the past with other cases, where politicians asked for more regulations and these regulations didn't help stabilise the situation," he told the BBC. "It's a very complex issue. It involves risk management rating agencies, accounting principles, "market architecture" and business models. We need to analyse the situation thoroughly. "If there are clear deficits in certain areas, for example, in the case of mortgage originators in the US, then some more regulation may be needed. But overall, I think the current regulatory framework is strong enough. Basel 2 is an important step in the right direction." The IIF is considering the idea that a group of around 10 to 20 financial experts would oversee the markets and spot possible risks. It also recommended that chief risk officers should report directly to CEOs and have a seat on the management boards of all banks. "I am generally against any bail-outs of lenders or investors. I do think the market is strong enough," Dr Ackermann said emphatically. "But there are exaggerations which can lead to difficult situations as we have seen in the housing market in the US. I have asked for a policy mix consisting of central bank interventions, injecting liquidity, of government support and of course market participants contributing their own part," he explained. "In the US, they are doing that in a very pragmatic way - buying certain tainted assets and using them for collateral to inject liquidity. But it would be much better if investors come back, then these measures would not be required. "In order to prevent a global recession, or a real meltdown in the financial markets, every kind of co-operation, between different entities, public sector and private sectors, governments and central banks is welcome." The IIF has proposed that rating agencies should adopt externally-monitored standards for checking their structures. "This is an interim report but we are having discussions with rating agencies," confirmed Scotiabank's Mr Waugh "We believe there should be an independent review to ensure there is quality control. We are learning all the time¿ none of us can be arrogant (about risk.)." The co-chair of the IIF, Cees Maas, said companies and regulators needed to review the "limitations" in the "mark-to-market" system - which requires banks to value asset-backed securities constantly even if markets dry up. The system has been criticised for heightening the scale of write-downs. The IIF suggests a form of "circuit-breaker" could be implemented to "limit the destabilizing downward spiral of forced liquidations, write-downs and higher risk and liquidity premia". Despite the current turmoil, Dr Ackermann is pretty sanguine about the future. "I think there have been some positive signals in the markets in the last few days. We need a phase of relatively stable markets. We had that several times in the last six months, but then there was a new shock somewhere in the world which led to volatility and instability. "We need confidence to come back and investors to come back to the market. They will see that a lot of prices are generally cheap now, and it's attractive to start buying now." The IIF plans to publish a final report on best market practices, leading to the establishment of a code of conduct, this summer. However, by then, the markets could be a facing a whole series of different problem.