Banking body issues warning

Banks will need a healthy push by governments to fix balance sheets, abandon risky businesses and serve the public to avoid prolonging the financial crisis, the Bank for International Settlements said.

Lenders, almost four years after the collapse of Lehman Brothers, still hold overvalued assets and are postponing necessary recapitalisations while relying on official funding, especially in Europe, the BIS said in its annual report released yesterday.

Banks are also returning to risks akin to those that led to the crisis, it said, adding that governments need to put more pressure on them by enacting and enforcing new rules.

“Public policy must move banks to adopt business models that are less risky, more sustainable and more clearly in the public interest,” the BIS said in the report.

Global regulators have warned that the US, the EU, and Japan may fail to fully implement bank-capital rules drawn up to prevent a repeat of the financial crisis that followed Lehman’s collapse. Nations are facing a Jan 2013 deadline for implementing the new rules, which more than triple the core capital that lenders must have to stave off insolvency, and require banks to build up buffers of easy-to-sell assets.

The BIS, based in Basel, is owned by 60 central banks for which it acts as a counterparty and trustee. It is also hosting policy-making groups including the Basel Committee on Banking Supervision and the Financial Stability Board and provides research and statistics.

While the implementation of the new rules by the Basel committee is lagging behind, banks are still highly leveraged, partly because they continue to expect state bailouts, the BIS said. Another “worrying sign” is that trading returned as a major revenue source for banks. In some emerging markets, credit and asset price booms have inflated banks’ profits in ways “reminiscent of advanced economies” before the crisis, it said.

“These conditions are moving the financial sector towards the same high-risk profile it had before the crisis. Recent heavy losses related to derivatives trading are a reminder of the dangers associated with such a development.”

Eurozone policy makers, who are in the third year of fighting a debt crisis, face the biggest immediate challenges, the BIS said. European banks are still weighed down by overvalued legacy assets that are a drag on profits and a cause for mistrust between banks that continues to clog interbank lending, it said.

The BIS joined the IMF in saying that the currency union must create a cross-border banking system by unifying bank regulation, supervision, deposit insurance and the resolution of failing lenders. That could revive interbank lending and sovereign access to funding, it said.