Chinese govt. economist includes gold in plan to slow rise in FX reserves

Section:

By George Parker
Financial Times, London
Sunday, April 9, 2006

http://news.ft.com/cms/s/66c09a88-c802-11da-a377-0000779e2340.html

VIENNA -- Europe's financial regulators have held a "war game"
exercise, simulating a continent-wide financial crisis, amid fears
they are ill- prepared to stop a problem in one country spreading
across borders.

The exercise involved simulating the collapse of a big bank with
operations in several large countries to see whether the European
Central Bank, national central banks and finance ministries could
work together to contain the crisis.

It is understood the exercise took place at the headquarters of the
ECB in Frankfurt at the end of last week. One person involved
said: "It is like checking whether a nuclear power plant can survive
a plane crashing into it."

The exercise took place on the eve of a meeting of European Union
finance ministers and central bank chiefs in Vienna, at which the
bloc's financial stability was high on the agenda. Officials at the
meeting confirmed that ministers had discussed the ECB crisis
management exercise.

The aim was to test the ability of national regulators to share
information with other national bodies in a crisis and to
overcome "differences in culture" and other practical obstacles. The
results are being analysed and will be reported to the Ecofin
council in June.

Europe's vulnerability to a cross-border financial crisis was
revealed in a confidential report prepared by officials for the
Ecofin council. Regulators are particularly worried about the risks
to financial stability posed by the growth in hedge funds and credit
derivatives.

It said that "progress has been insufficient in most of the member
states" in putting in place national structures for crisis
management, and urged national regulators to stage their own crisis
simulation exercises.

The EU has rejected the creation of a single European financial
regulator to manage cross-border risks, and has instead placed its
faith in national authorities working together.

Last year regulators signed an agreement that they would share
information openly and speedily in the event of a crisis in a
national financial institution, in an attempt to stop the contagion
spreading across Europe's single market.

The report submitted to the Ecofin council identified a possible
housing market crash, a bird flu pandemic and high oil prices as
potential sources of risk, but said that the situation in the
banking sector was "solid."

However, the report warned that hedge funds and credit derivatives
were sources of concern "as related risks remain opaque and they
have become extremely relevant in assessing financial stability both
across borders and across all financial sectors."

It said that, while hedge funds could contribute to market
efficiency, they "can also be sources of systemic risks."

Credit derivatives markets were said to have grown by 128 percent in
2005 compared with the previous year, with a nominal value of
12,430 billion ($14,900 billion, 8,700 billion) in June last year.

The report welcomed the efforts by regulators to alleviate risks "by
encouraging the markets to develop back-office processes to overcome
the problems of unconfirmed trades which could escalate into wider
instabilities in the financial system."

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