Dow Jones Newswires

REPEAT:Fed's Meyer Urges More Banks'
Credit Risks Disclosure

Dow Jones Newswires

WASHINGTON -- U.S. regulators must keep closer tabs on the credit risks
taken by the country's financial institutions as they expand by mergers and
acquisitions into new areas of business, Federal Reserve Governor Laurence
Meyer said Monday

In a speech to the North American Economics and Finance Association in New
York, Meyer called for tougher capital-adequacy and financial disclosure
standards for U.S. financial institutions. He also said it may be a good idea to
require financial institutions to issue small amounts of subordinated debt that
could provide a market-based early warning system.

"Oversight has become much more continuous and risk-focused than before,
especially for the largest institutions," Meyer said. "We can no longer rely on
periodic on-site examinations to ensure that these largest banking organizations
remain sound, but rather must be confident that their risk-management practices
and internal controls are adequate and effective at all times."

He said the expansion of banks into "nontraditional" activities such as securities
underwriting warrants increased regulatory oversight because it can involve new
risks to financial institutions protected by federal deposit insurance.

"In my judgment, there is no foolproof way to completely prevent the risks from
nonbanking activities from spreading to the insured bank and giving some of the
benefits of the safety net to the nonbanking activity at the margin," he said. But
he added the risks can be minimized.

Meyer said regulations can be strengthened in three ways. First,
capital-adequacy standards should be toughened because the international
Basle Accord defining those standards is "increasingly out of date," particularly
in the way it treats credit risks. Second, he said, U.S. financial institutions
should be pressed to provide more detailed and timely information about their
credit risks.

"Possibilities include more frequent reporting and the disclosure of credit-risk
modeling procedures, risk positions, and perhaps even supervisory
evaluations," Meyer said.

Third, he said, it may be a good idea to require banks to issue "minimum
amounts of subordinated debt to non-related parties." Changes in the prices of
that debt would then provide "useful signals to supervisory authorities, alerting
them to examine a bank or inspect a holding company more quickly than they
otherwise would."

U.S. financial institutions have consolidated rapidly over the last 10 years.
Meyer said the number of banks and banking organizations fell by 30%
between 1988 and 1997, while the share of total domestic banking assets held
by the 10 biggest banking organizations swelled to 34% from 20%.

 -By Joe Rebello