By Simon Kennedy and Christian Vits
Jan. 11 (Bloomberg) -- European Central Bank President Jean-Claude Trichet, who warned investors against taking on too much risk two years before the financial crisis started, may be about to sound the alert again.
Trichet and fellow central bankers met financial executives in Basel, Switzerland, yesterday after officials signaled concern banks are rebuffing tougher regulation and embracing risk as the turmoil ebbs.
Risk is back in the spotlight as China witnesses a record increase in credit, Goldman Sachs Group Inc. posts record earnings and the MSCI World index of stocks logs a 74 percent gain since March. Federal Reserve Chairman Ben S. Bernanke and Chinese central bank governor Zhou Xiaochuan will attend talks in Basel today of the Group of 10 central banks, which Trichet chairs.
“As liquidity is still abundant there’s certainly a danger that an excessive risk taking behavior returns,” said Carsten Brzeski, an economist at ING Group in Brussels. “However, central banks face a dilemma as they can hardly do more than calling on the banks at the moment.”
Trichet, who warned in November 2005 about “an underestimation of risks by financial markets,” is scheduled to brief reporters around 1 p.m. local time today.
He may join the chorus of officials voicing concern about excessive risk taking, which led to the credit bust of 2007. Financial Stability Board Chairman Mario Draghi told reporters on Jan. 9 that markets may be overly optimistic about the recovery. Fed Bank of Kansas City President Thomas Hoenig said Jan. 7 that the Fed should move “sooner rather than later” to reduce stimulus.
“The markets are becoming risky again, bankers are becoming risk-takers again,” Draghi, who is also governor of the Bank of Italy, said in Basel. “At the same time, bankers should be aware of the fragilities in the system.”
The Bank for International Settlements, which is hosting today’s gathering, last month warned that low rates often spur banks to take on too much risk. In the U.S., regulators told banks on Jan. 7 to guard against possible losses from an eventual end to low interest rates.
“It is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases” in borrowing costs, the Federal Financial Institutions Examination Council, which includes the Fed, said in a statement.
Central Bank Action
Markets are rediscovering their appetite for risk after central bankers truncated the recession with record low interest rates and governments around the world bailed out the banking system. The Fed has cut its benchmark rate to almost zero and taken on more than $1 trillion of assets on its balance sheet to combat the credit freeze, while its Japanese counterpart’s benchmark is also near zero. The ECB’s main rate is at a record- low 1 percent.
“The massive amount of financing and cheap funding that continues to be available to banks is a fertile ground for heavier risk taking,” Karsten Schroeder, chief executive officer of Amplitude Capital LLP, a Swiss money manager, told Bloomberg Television.
Goldman Sachs and JPMorgan Chase & Co. are among the banks taking advantage of low rates, a stock-market rally and the demise of competitors like Lehman Brothers Holdings Inc. to bolster profits. Banks have also increased lobbying against reforms aimed at restricting how much risk they can take.
Commercial bankers, who traditionally attend the January meeting in Basel, met with policy makers to discuss risk taking and regulation yesterday. Deutsche Bank AG Chief Executive Officer Josef Ackermann was among those scheduled to be there.
“There won’t be much sweet talk,” said Juergen Michels, chief euro-region economist at Citigroup Inc. in London before the meeting. “Central banks could threaten to follow up with action if banks don’t stop taking excessive risks."