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To: long-gone who wrote (30593)	3/24/1999 1:22:00 PM
From: lorne	Read Replies (1) \| Respond to of 116764

Fed says banks have learned from LTCM debacle WASHINGTON, March 24 (Reuters) - U.S. banks have learned their lessons from last year's near-collapse of a major hedge fund, but more remains to be done to avoid similar problems in the future, top Federal Reserve officials said on Wednesday. Appearing before a subcommittee of the Banking Committee of the U.S. House of Congress, Federal Reserve Governor Laurence Meyer and New York Fed President William McDonough said the nation's banking supervisors were working hard on putting in place appropriate controls on highly-leveraged institutions such as the troubled Long-Term Capital Management fund. But both stressed that without changes in the private sector, the public sector could only do so much. Improved market discipline and ensuring that banks properly evaluate the risks involved in lending to hedge funds were key to preventing future debacles, they stressed. "Despite these various public sector initiatives, the real key to effective market discipline lies in the players themselves -- the private sector," Meyer said. "The market has clearly learned from the LTCM incident and our supervisory staff has seen significant tightening of credit standards on hedge funds as well as improvements in the risk management processes at major banking institutions," he added. Meyer said strengthening risk management systems of hedge fund creditors and their trading partners was the most efficient way of minimizing the risk to the whole banking system posed by the activities of private investment funds. He noted LTCM, whose near-collapse last September brought the world financial system to the brink of chaos, was unusual among its peers because of the size of its positions and the amount of leverage it employed, but said some of its basic problems were shared by other such funds. "While LTCM was found to be atypical ... shortcomings in risk management of hedge fund counterparty exposures appeared to extend beyond this one fund," he said. McDonough, the key figure in convincing LTCM's creditors to launch a rescue effort of the troubled fund, said he was confident U.S. financial supervisors had adopted the right strategy to avoid future problems with highly-leveraged funds. "Our approach to improving the financial system's interactions which (such funds) is to focus quickly and aggressively on the decisions by banks that could create excessive leverage or imprudent credit exposure," he said. McDonough also chairs the international Basle Committee on Banking Supervision, which recently released a report on the LTCM debacle. McDonough, too, noted that banks had tightened their credit risk management standards in the wake of LTCM's problems. "However, it is important that supervisors ensure that progress continues. Memories tend to be short, and we want to make sure that as markets calm down, as they have in the past month, banks do not return to the old ways of doing business." reuters.com