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Last Updated: Sunday, 21 October 2007, 21:56 GMT 22:56 UK
Banks agree private rescue plan
By Steve Schifferes
Business reporter, BBC News, Washington

A woman in Orlando, Florida, who has been hit by the US housing market strain.
Many have been hit by the difficulties in the US housing market
The world's biggest banks have endorsed a private rescue plan to restore the world's financial system to health.

The plan also has the backing of the US Treasury, which urged private banks to take measures to restore confidence to fragile credit markets.

They have been spooked by the existence of billions of dollars in bad debts from US sub-prime mortgages.

Under the plan, the banks would package up their bad debts into a single "superfund" worth about $200bn.

This could then be sold off to private investors.

Speaking on the sidelines of the IMF/World Bank annual meeting, Josef Ackermann, chairman of Deutsche Bank and the bankers' trade association the Institute of International Finance (IIF), said that his members "welcomed market initiatives aimed at accelerating the restoration of confidence and liquidity" to world credit markets.

But he added that it was "premature to make a firm judgement as not all the details are known".

The three biggest US banks have backed the plan, but there has been some uncertainty as to whether European banks - and investors such as pension funds - would take part, with the fear of more undisclosed bad debts overhanging the discussion.

Mr Ackermann urged all banks to fully disclose the nature of their losses. Banks, he said, should take their losses in order to reassure the markets.

He added that "the system is healthy, the banks are strong, and we have not taken risks we could not adjust".

Further risks

But Bill Rhodes, the president of Citibank's international banking arm, warned that the crisis was not over, and could spill into emerging markets, and get worse in the US.

"The period immediately ahead is fraught with risks for the global economy - risks which could spill over into emerging markets' finance," he said.

Freight container being unloaded at docks near London
The global economy seems set for more uncertain times

And although there are record capital flows - estimated by the IIF at $625bn this year - going to developing countries, "it would be a mistake for the emerging market authorities to be complacent just because their markets have performed better than the developed countries in recent turbulent times".

Mr Rhodes said the main danger, however, was that the sub-prime mortgage crisis would spread to the rest of the US housing market, causing a fall in house prices, and a decline in consumer confidence and spending.

This could lead to a more serious recession in the US, which would in turn worsen the financial crisis.

Mr Rhodes said there were further risks - of a sharp collapse in prices in developing country stock markets, of rising inflation, driven by high oil and commodity prices, and of a potential collapse of the value of the US dollar, due to the growing trade imbalance with China and other Asian countries.

Learning lessons

The private banking sector takes some of the responsibility for the current problems, according to Mr Ackermann, but is keen to learn the lessons to prevent future crises.

It is considering the creation of a monitoring committee to look at financial market conditions in rich countries, which could serve as an early warning system where problems might be spotted before they became too serious.

And it is establishing a working group to help set standards in lending, and in the more prudent use of the some of the complex financial instruments which are at the root of the current turmoil.

It wants to work with the US Treasury, the IMF, and other financial regulators to stabilise the market, while it is concerned that an over-reaction which produced too much regulation would choke off financial innovation.

And the bankers want to urgently implement the new international banking rules known as Basel II, which have been held up by US objections.

Mr Ackermann admitted that the banks had been taken by surprise by the swift collapse of some key credit markets, which their models did not predict.

He said that it had not been fully appreciated that in a globalised world, the spread of risk had its downside, in a lack of understanding of the complex financial instruments and the nature of the risk that was now being sold around the world.

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