ECB's Trichet Calls for "Change of Culture" in Banking System.
European Central Bank President Jean-Claude Trichet called Wednesday for a "significant change of culture" in the financial system, calling for more transparency as banks learn the lessons of the subprime crisis.
Trichet called for banks to be more open and start thinking more in the long-term because this was the only way of "avoiding contagion, herd behavior and ... the propagation of turbulences in times of difficulty."
Major banks have run up billions in losses after many highly rated investments were shown to be based on risky assets -- U.S. housing loans to people with poor credit. It is still unclear how far this will affect the real economy as banks shy away from new risk, tighten conditions and raise prices for loans to businesses and home buyers.
Trichet warned that large euro banks are likely to face lower revenue as banks retrench from risk-taking -- but said the crisis has hit after several years of strong profits left banks able to cope with a downturn. He repeated a call for banks to "promptly and fully disclose on- and off-balance sheet risk exposures."
Fears that banks are still concealing major losses lead to a bank run on Bear Stearns that saw the bank's fire sale to JP Morgan. "I would call for a further significant change of culture at the national, European and global level," he told the European Parliament's economy committee. "I would sum up this cultural change with two words: transparency and anti-cyclicity."
More openness was essential to make sure all market players have a clear picture of what is happening while regulators need to look at financial rules that tend to amplify booms and busts, he said. He also said financial supervisors should tell banks how to value complex investments that may run up huge losses in the wake of the subprime crisis.
Guidance from auditors and supervisors "is warranted" to improve structured product valuations for illiquid assets, he said. Regulators also need to make sure that banks have enough capital and liquidity to deal with sudden shocks.
Trichet said the role of the euro-zone's central bank was to preserve confidence by "firmly anchoring medium- to long-term inflation expectations for the euro area while at the same time ensuring the smooth functioning of the short-term money market.
His words were a defense of the ECB's refusal to cut interest rates -- in line with the U.S. Federal Reserve and the Bank of England -- as the financial system froze as banks became fearful to lend money and take on new risks in the wake of last year's subprime crisis.
He said current record-high inflation in euro-zone nations will go on for longer than expected and a tight labor market may lead to pay hikes that may cause a price spiral. Inflation was based on higher food and energy prices and would be "more protracted" than expected, he said. Further price rises for oil and agricultural products would add to high demand and low supply of goods to build pressure for higher inflation.
He also repeated a warning that new problems could emerge to push up prices. "Wage growth may be stronger than currently expected as well as the pricing power of firms, notably in market segments with low competition," he said.
He said it was imperative that all -- governments and trade unions -- meet their responsibility to the greater economy to restrain the "wage-setting" negotiations that could trigger these second-round effects that would worsen inflation.
Uncertainties over economic growth are "unusually high," he said, insisting the euro economy was basically sound and more investments and higher spending should help feed the economy's expansion.
European Central Bank President Jean-Claude Trichet called Wednesday for a "significant change of culture" in the financial system, calling for more transparency as banks learn the lessons of the subprime crisis.
Trichet called for banks to be more open and start thinking more in the long-term because this was the only way of "avoiding contagion, herd behavior and ... the propagation of turbulences in times of difficulty."
Major banks have run up billions in losses after many highly rated investments were shown to be based on risky assets -- U.S. housing loans to people with poor credit. It is still unclear how far this will affect the real economy as banks shy away from new risk, tighten conditions and raise prices for loans to businesses and home buyers.
Trichet warned that large euro banks are likely to face lower revenue as banks retrench from risk-taking -- but said the crisis has hit after several years of strong profits left banks able to cope with a downturn. He repeated a call for banks to "promptly and fully disclose on- and off-balance sheet risk exposures."
Fears that banks are still concealing major losses lead to a bank run on Bear Stearns that saw the bank's fire sale to JP Morgan. "I would call for a further significant change of culture at the national, European and global level," he told the European Parliament's economy committee. "I would sum up this cultural change with two words: transparency and anti-cyclicity."
More openness was essential to make sure all market players have a clear picture of what is happening while regulators need to look at financial rules that tend to amplify booms and busts, he said. He also said financial supervisors should tell banks how to value complex investments that may run up huge losses in the wake of the subprime crisis.
Guidance from auditors and supervisors "is warranted" to improve structured product valuations for illiquid assets, he said. Regulators also need to make sure that banks have enough capital and liquidity to deal with sudden shocks.
Trichet said the role of the euro-zone's central bank was to preserve confidence by "firmly anchoring medium- to long-term inflation expectations for the euro area while at the same time ensuring the smooth functioning of the short-term money market.
His words were a defense of the ECB's refusal to cut interest rates -- in line with the U.S. Federal Reserve and the Bank of England -- as the financial system froze as banks became fearful to lend money and take on new risks in the wake of last year's subprime crisis.
He said current record-high inflation in euro-zone nations will go on for longer than expected and a tight labor market may lead to pay hikes that may cause a price spiral. Inflation was based on higher food and energy prices and would be "more protracted" than expected, he said. Further price rises for oil and agricultural products would add to high demand and low supply of goods to build pressure for higher inflation.
He also repeated a warning that new problems could emerge to push up prices. "Wage growth may be stronger than currently expected as well as the pricing power of firms, notably in market segments with low competition," he said.
He said it was imperative that all -- governments and trade unions -- meet their responsibility to the greater economy to restrain the "wage-setting" negotiations that could trigger these second-round effects that would worsen inflation.
Uncertainties over economic growth are "unusually high," he said, insisting the euro economy was basically sound and more investments and higher spending should help feed the economy's expansion.
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