DAVOS-BIS chief cheers end of dollar lending,warns on leverage

* BIS head says dollar liquidity end a positive sign

* Caruana warns banks against high profit targets

* Says risk healthy, but not excessive risk

By Krista Hughes and Niclas Mika

DAVOS, Switzerland, Jan 28 (BestGrowthStock) – Central banks’
withdrawal of emergency U.S. dollar lending is a positive sign
that financial markets are returning to health, the head of the
Bank for International Settlements said on Thursday.

In interviews with Reuters and Reuters Insider Television,
BIS general manager Jaime Caruana also warned commercial banks
against being too greedy with profit targets as the financial
environment improves.
Major central banks late on Wednesday said they will stop
the emergency U.S. dollar lending introduced during the
financial crisis, the first unified retraction of central banks’
extraordinary support for financial markets. [ID:nN27156683]

“To some extent that is a very positive indication that
markets have started to work and have started to work properly,”
said Caruana. “It is not necessary for the central banks to step
in there.”

The expiry of “swap” arrangements central banks had set up
with the U.S. Federal Reserve expire on Feb. 1 and indicate
growing confidence that the financial system is returning to
health after extraordinary liquidity support and rate cuts by
central banks and extra government spending.

“You have to reduce dependence, it’s very important that
markets work themselves,” Caruana said.

The head of the BIS, which acts as a forum for central
banks, said he would not give policymakers advice on when to
raise policy rates.

But he noted they should take seriously the risk of leaving
liquidity support in place for too long, which could lead to
potential distortions in competition and incentives to take too
much risk.

“It’s a narrow path,” he said. “Neither too early nor too
late … the abyss or the chaos was avoided, now we really have
to think about how all the extraordinary measures are withdrawn
with the necessary flexibility.”


Central banks have repeatedly urged their commercial
counterparts to improve their capital backing and increase
lending to the private sector, a key element in the economic
recovery and a theme U.S. President Barack Obama stressed in his
State of the Union speech on Wednesday.

But banks are also concerned about tough new regulations
coming in, such as U.S. plans to curb big banks, which many fear
will weaken their performance.

Caruana said the U.S. plans sent a a “strong message” and
went in the right direction and were already part of the wider
discussion in reforming the financial system.

“I think it’s very important that these things are
coordinated. We are in a global world and that requires global
solutions,” he said.

Caruana cautioned banks against rushing to take on too much
risk, echoing comments by People’s Bank of China deputy governor
Zhu Min on Tuesday.

Zhu said a 10 percent return on equity (ROE) ratio for banks
was maybe more reasonable than the 14 to 15 percent levels seen
before the crisis, and the 19 to 20 percent targets of some

“Taking risk is part of the solution, it is excess risk that
is the problem and that’s a very delicate balance,” Caruana

“ROE that is only based on leverage has been part of the
problems of this crisis, it should not be like that. We should
not go back to these very high ROE that are based on leverage.”

The timetable for implementing reforms would allow countries
discretion, he said.

“It is always difficult to say ‘press the button now’ but
there are good experiences of countries that have done so, so
discretion will always be there,” he said.

Stock Report

(Additional reporting by Peter Thal Larsen)

DAVOS-BIS chief cheers end of dollar lending,warns on leverage