G10 warns of bank failures

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G10 warns of bank failures By Doug Cameron Published: January 25 2001 09:54GMT | Last Updated: January 25 2001 18:01GMT

Banking failures, such as have occurred in Japan, may pose a greater risk to the global financial system following the recent wave of consolidation in the financial services industry, according to an authoritative report published on Thursday.

The report, commissioned by the G10 group of industrial nations, also noted that recent M&A activity had provided only "weak" evidence of efficiency gains and called on regulators to be alert to potentially harmful effects on competition.

The findings coincide with increasing concern among regulators about the health of the global banking system. This is inspired by the deterioration in the credit quality of some US banks, exposure to the global telecommunications industry and the continuing indebtedness of the Japanese financial system.

The G10 working group chaired by Robert Ferguson, vice-chairman of the US Federal Reserve, examined consolidation in 13 countries and called on regulators to step up contingency planning against potential bank failures.

It concluded that the creation of ever-larger and more complex banks and financial conglomerates "increased the probability that the 'work out' or 'wind down'...would be difficult and could be disorderly".

The warnings were accompanied by a call for greater co-operation between international financial regulators, though the report noted that some contingency planning had already begun to prevent the spread of bank-related crises across national borders.

The report also noted that the creation of larger and more complex institutions has made it more difficult to assess their financial health and had an "ambiguous effect" on the potential for market discipline to control risk-taking.

Market discipline is one of the central pillars of new proposals outlined earlier this month by the G10 to ensure banks hold adequate capital against potential risks.

-- kevin (ktross@mailcity.com), January 25, 2001

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