European Central Bank Governing Council member Christian Noyer warned that banks are taking the same risks that led to the financial crisis and said they should preserve capital rather than pay it out to bankers and investors.
His comments came as regulators around the world mull reforms to lower the risks that large banks can pose to the financial system and rein in the type of recklessness that fueled the credit crisis.
Noyer said impressive bank profits in recent weeks were a result of public policies to combat the crisis, and did not mean the industry had recovered its balance or that further reforms were not necessary.
Nothing could be further from the truth. Indeed, one major risk in the period to come is the emergence of a business as usual mentality, Noyer said in a speech at a financial conference in Singapore on Monday.
There are signs that parts of the financial industry have resumed risk taking practices reminiscent of those which led to the crisis, he said, pointing to bankers' pay packages that appeared out of line with performance.
Recent news that Goldman Sachs had set aside $16.8 billion to pay staff, so soon after repaying $10 billion in taxpayer money, fueled concerns that Wall Street is returning to practices commonplace before the crisis.
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Noyer, who is also the head of France's central bank, said the global economy has stabilized and the worst had been avoided. But he noted that bank credit to businesses, especially small and medium sized companies, was faltering.
Most of the negative effects of the economic downturn on balance sheets are still to come, he said. Efforts toward long term reform must not create, in the short run, additional downside risks to economic activity.
Noyer said banks in the long run needed to be robust and better capitalized, and in the short term should hang on to profits to strengthen balance sheets and finance credit.
This would require some restraint in dividend distribution and of course in the overall amount of variable compensation, he said. In parallel, all possibilities to issue new equity should be exploited.
U.S. Federal Reserve Chairman Ben Bernanke said last week that requiring big banks to hold more capital was under consideration.
Noyer said as a result of the crisis the financial system will be permanently changed, but the details were still up for discussion.
We don't know yet what kind of financial system will emerge from the crisis. We need to think about this.
(Editing by Kazunori Takada)