International banks take blame for credit crisis

The world’s leading banks on Wednesday publicly accepted much of the blame for the credit crisis, as the International Monetary Fund slashed its estimates for global growth and warned that the US downturn will last longer than most people expect.

The IMF said the US would suffer a recession this year, recovery would not begin until next year, and growth would remain well below trend even in 2009.

The Institute of International Finance, meanwhile, representing more than 375 of the world’s largest financial companies, acknowledged ‘major points of weaknesses in business practices’, including bankers’ pay and the management of risk.

But it said it would be ‘completely wrong’ for the authorities to impose much greater regulation on the industry.

In its interim report on the causes and consequences of the credit crisis, the IIF promised a code of conduct for better self-regulation of the industry.

“We think it would be completely wrong to jump to some premature regulatory measures,” Josef Ackermann, chief executive of Deutsche Bank and chairman of the IIF board, said. “We want to demonstrate we can do a better job within the industry.”

The IIF report detailed a series of failings on the part of the banks, including managing risks; conflicts of interest over bankers’ pay; the over-reliance on models and inadequate protection against shortages of liquidity.

It said that while pay should be left to individual banks, there should be greater deferral of bonuses and setting pay ‘on a risk-adjusted basis’, implying paying less to bankers who have simply taken big risks and struck lucky.

The IMF’s new forecasts, meanwhile, offered a bleak outlook for growth in both the US and Europe, challenging the relatively bullish views of national authorities and central banks.

It contradicted the Federal Reserve’s forecast that the US economy will start to recover in the second half of this year and grow above trend next year “predicting growth at just 0.5 per cent this year and 0.6 per cent in 2009.

The US quickly challenged the IMF forecast. David McCormick, Treasury undersecretary, said “our view...is a stronger view”, adding that most other governments were more bullish than the IMF as well.

Courtesy: FT.com