Summit date missed for urgent banking reforms

THE document that would lay down new rules for preventing a re-run of Asia's banking crisis was missing from the meeting of some of the world's top bankers in Macau last week.

If all had gone according to plan, the summit would have been able to discuss an upgraded Basle Accord from the Bank of International Settlements (BIS).

The BIS, which co-ordinates central bank policies, has been working to produce a system which would offer more sophisticated methods of handling risk than the existing version, introduced in 1988, which laid down that commercial banks should keep a capital ratio of eight per cent of their assets ready to meet unexpected demands.

As billions of dollars of loans turned bad in Asia - especially in Indonesia and Thailand - capital-adequacy ratios slumped well below that figure.

Many banks have a massively negative capital ratio, and trying to rebuild their capital ratio back to eight per cent is reckoned by some experts to be impossible without a complete halt on lending, which would be economically disastrous.

The revised accord was expected by the middle of last month, but as the bankers were packing their bags to head for the enclave last week, Hans Tietmeyer, president of Germany's central Bundesbank, said the process was well behind schedule. He did not reveal what, or who, was holding up the agreement on the draft, which is expected to contain revisions of loan classifications, as well as suggestions for new ways of monitoring risk.

While some reports suggest that the draft might not appear for some months, BIS secretary-general Gunter Baer suggested in Macau that it would be out 'soon', but gave no firm date.

New rules are seen by some analysts as urgent, as Asia's economies start to improve and bank lending begins to accelerate once again.

Mr Baer issued a warning that the apparent revival in economic activity had in no way reduced the need for serious restructuring of financial systems and strengthening of regulation and supervision although some of the pressure might come off banks if bad loans began to perform once more.

'In the light of the, at best, modest recovery, there is a question of whether the financial markets are not too far ahead of the real economy. The size of the problems faced by the authorities remains daunting,' Mr Baer said.

The prospects for Asian economies would depend on how the financial-sector reform was handled by the authorities.

Banking regulation and supervisory regimes needed to be strengthened, he said, while efforts to restructure must continue.

Although authorities of several countries in the region had already embarked on official bank restructuring and recapitalisation schemes, further efforts were clearly needed, Mr Baer said.

'Speed and perseverance is of the essence. Delays and procrastination usually make things worse and allow, too easily, reviews of the situation in the light of new circumstances such as an improved economic climate.' A new Basle Accord could impose much-needed discipline on big lending institutions in the developed countries, and not just the banks in emerging markets such as Asia and Latin America.

Mr Baer said not all the responsibility for the crisis lay with the developing countries of Asia, for international banks also bore blame.

Events leading to the financial crisis suggested failings in the well-supervised financial markets of the industrial countries, Mr Baer said.

'The rapidly growing exposure to weak counter-parties in Asian countries should have given a clear warning of vulnerability and growing risks,' he said.

'The laxity in lending policies is hard to understand.'