BIS chief cheers end of dollar lending, warns on leverage

Thu Jan 28, 2010 10:03am EST
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article | Single Page
[-] Text [+]

By Krista Hughes and Niclas Mika

DAVOS, Switzerland (Reuters) - 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.

"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 February 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.   Continued...

<p>Jaime Caruana, General Manager of Bank for International Settlements, Ibrahim Dabdoub, Group CEO of National Bank of Kuwait, Robert E. Diamond Jr, Barclays President, Stefan Lippe, CEO of Swiss Re, Jonathan Nelson, CEO of Providence Equity Partners and Guillermo Ortiz, Professor of ITAM (Instituto Tecnologico Autonomo de Mexico) (L-R) attend a session at the World Economic Forum (WEF) in Davos January 27, 2010. REUTERS/Arnd Wiegmann</p>