TOP BANKS INVITED TO BASEL RISK TALKS / THE FINANCIAL TIMES ( RECOMMENDED READING )

Top banks invited to Basel risk talks

By Henny Sender in New York

Published: January 6 2010 23:30

The Bank for International Settlements will gather top central bankers and financiers for a meeting in Basel this weekend amid rising concern about a resurgence of the “excessive risk-taking” that sparked the financial crisis.

In its invitation, the BIS cited concerns that “financial firms are returning to the aggressive behaviour that prevailed during the pre-crisis period”.

The BIS, known as the central banks’ bank, outlined in a restricted note to participants some specific proposals that it believes could create a healthier financial system. Those proposals including lowering return-on-equity targets for the banks as a way to discourage such risk taking.

Private sector bank chiefs attending the meeting at the BIS in Basel include Larry Fink of BlackRock, Vikram Pandit of Citigroup, and John Stumpf of Wells Fargo.

Lloyd Blankfein, Goldman Sachs chief executive, and Jamie Dimon, chief executive of JPMorgan Chase, were invited but are not planning to attend.

The meeting comes at a moment of intense uncertainty, with the global economy’s tentative recovery shadowed by “the overhang of private-sector debt and rapidly rising public debt”, and high unemployment.

“The concern here is that the prolonged assurance of very cheap and ample funding may encourage excessive risk-taking,” the BIS invitation note says.

“For example, low financing costs coupled with a steep yield curve may make participants vulnerable to future increases in policy rates – a situation reminiscent of the 1994 bond market turbulence which followed the Federal Reserve’s exit from a prolonged period of low policy rates.”

The note also expresses concern about deteriorating public finances and warned that doubt about fiscal prudence “could seriously disrupt bond markets if it triggered concerns about creditworthiness or inflation because of concerns with government incentives to inflate debt away.”

Among the charts included with the note is one indicating the cost of credit insurance against sovereign defaults.

In the past, the BIS has invited the top chiefs of private-sector banks to such gatherings in Basel on a yearly basis. But such meetings have been more frequent recently.

“These meetings are an attempt to bring a real world perspective to the deliberations of the wise men of the world,” one Federal Reserve official said. Central bankers “want to get a sense of what the markets are reacting to.”

Copyright The Financial Times Limited 2010.