G7 leaders may demand rethink of bank business models
April 5th, 2008 | by admin |By Huw Jones
BRDO, Slovenia, April 5 (Reuters) - Some banks will have toadapt their business models under policy recommendations to bemade to global financial leaders at the G7 meeting next week,Dutch central bank chief Nout Wellink said on Saturday.
The Group of Seven industrialised powers meets in Washingtonon April 11 to discuss a regulatory response to an eight-monthold credit crunch that is crimping global economic growth.
“We will come with a long list, a really long list, ofrecommendations,” Wellink, who chairs the global Basel Committeeon Banking Supervision, which is part of the Financial StabilityForum that coordinates the G7 regulatory response, said.
The financial market turmoil began last year with defaultson U.S. home loans and rapidly spread through the financialsystem via complex credit derivative products packaged, boughtand sold by the world’s major financial institutions.
“What we try to address is the underpinnings of theoriginate and distribute model. These underpinnings should bestrengthened,” Wellink said, speaking to reporters at the end oftwo days of meetings of European Union finance ministers andcentral bankers in Slovenia.
The “originate and distribute model” is the classicinvestment banking model of constructing packages of securitiesand selling them to a range of investors.
Many commercial banks have also moved from the traditional”buy and hold” model to originate and distribute where theydistribute credit risk to other market players, often in theform of opaque securitised products.
Some of these securitised products were based on underlyinghome loans and became worthless when the loans defaulted.
