Radical action to fight credit crisis discussed

Radical action to fight credit crisis discussed

By Krishna Guha

Published: March 31 2008 22:14 | Last updated: March 31 2008 22:14

Radical strategies to fight the credit crisis including temporary suspension of capital requirements, taxpayer-funded recapitalisation of banks and outright public purchase of mortgage-backed securities are being actively discussed by governments and central banks.

These were among possible next steps discussed in Rome on Friday at a meeting of the Financial Stability Forum, the body co-ordinating the global response to the market turmoil.

The discussion highlights the fact that global policymakers remain deeply concerned about the financial outlook and willing to explore extreme measures in spite of the stabilisation of markets following the rescue of Bear Stearns, the US investment bank.

The steps are set out in an options paper prepared for governments, banks and regulators by the FSF, led by Mario Draghi, the governor of the Bank of Italy, a copy of which has been obtained by the Financial Times.

Among the ideas floated was getting a large group of the most important banks simultaneously to disclose their financial positions based on a “common template” including information on the prices attributed to different securities and the methodologies used to derive them.

This would include standardised disclosure of exposures to collateralised debt obligations, residential and commercial mortgage-backed securities, leveraged finance, exposure to off-balance sheet entities and capital and liquidity resources. One party present said there was widespread interest in this idea.

The FSF proposed temporarily suspending capital and reporting rules that tie prudential requirements to market values of securities.

Regulators could temporarily change capital rules under Basel II to allow trading assets to be treated as available-for-sale, reducing their impact on capital calculations.

Alternatively, regulators could temporarily relax regulatory capital minimums wholesale, the FSF said. It noted that an alternative approach would be to suspend accounting rules for some assets, but said this could “damage market confidence.”

Authorities could organise a consortium of long-term private investors to buy mortgage assets from banks, possibly with state “co-investment” or governments could buy assets outright.

The FSF argued that there were “signficant private and collective benefits to assisting financial institutions in remaining as going concerns” – rather than allowing them to fail and then running down the remaining book of business.

The FSF said supervisors could require that regulated banks “conserve financial resources”.

The FSF raised the possibility that governments might want to “announce a coordinated operation to boost capital simultaneously in a number of institutions” with the help of public funds, to avoid stigma problems.

Central banks could further expand their liquidity support operations, including expanding the eligible collateral and providing emergency liquidity support to troubled institutions.

Many of the FSF’s ideas are likely to encounter resistance from governments and central banks, but the fact they are being mooted points to policymakers’ concern about the outlook and willingness to explore unorthodox solutions.