ECB chief urges analysis of markets and regulation

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European Central Bank president Jean-Claude Trichet called on Monday for careful analysis of the way financial markets function and the role of supervision.

Trichet acknowledged that current methods of supervision may not see the whole picture.

He spoke against a background of a long-running and controversial process of revisions to rules, nationally and internationally, affecting various parts of the financial services industries.

"We have to re-evaluate our understanding of the role of financial markets in our economies and our societies," Trichet told an ECB-sponsored conference on regulation to reduce systemic risk.

"We have to re-evaluate our understanding of the very nature of financial markets, which have shown themselves at times to be less efficient and far less atomistic then they were deemed to be," Trichet added.

The ECB will soon host the European Systemic Risk Board (ESRB), a body created to identify threats which could cause the entire financial system to collapse, a situation nearly faced when the US investment bank Lehman Brothers failed in September 2008.

"We also need to be conscious that the present economic models we - and other policy authorities - have at our disposal do not necessarily capture all the relevent dimensions of systemic risk," Trichet acknowledged.

He pointed in particular to "pockets" of financial systems "that are not considered and understood for their implications for financial stability."

Regulation will be a key issue for the G20 group of developed and developing nations at a November meeting in Korea, and has led to the drafting of so-called Basel III bank capital rules to bolster the foundation of the global banking system.

© 2010 AFP

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