FSB’s Draghi Sees Signs of Improvement in Economy

June 27 (Bloomberg) -- The world economy is showing “convincing signs of recovery,” Mario Draghi, chairman of the newly created Financial Stability Board, said today after its first meeting.

“We observe signs of improvement here and there,” Draghi, who is also a member of the European Central Bank council and governor of the Bank of Italy, said in Basel, Switzerland. “Still, the fragilities of the economy and the financial system are there.”

The Basel-based board, which succeeds the Financial Stability Forum, will look at risks to financial markets and ensure that regulators in each country act upon them. Its members represent economies from Argentina to the United States and institutions such as the European Central Bank and the International Monetary Fund.

The global recession is showing signs of easing as financial markets thaw. Government reports this week showed that Europe’s manufacturing and service industries contracted at the slowest pace in nine months in June, while U.S. consumer spending rose in May. The Organization for Economic Cooperation and Development raised its forecast for the economy of its 30 member nations for the first time in two years this week.

The Financial Stability Board “noted signs of improvement in the global macroeconomic outlook and in some financial markets,” Draghi said. “Banks have raised capital from the private sector, but the process of restructuring and strengthening bank balance sheets is not yet completed. Corporate bond markets continue to see strong primary issuance.”

$1.4 Trillion of Losses

Financial institutions around the world have amassed losses of more than $1.4 trillion during the financial crisis, data compiled by Bloomberg show. In Europe, governments and central banks are on the hook for more than 3.7 trillion euros ($5.2 trillion) of guarantees and funding. UBS AG, the European bank with the biggest losses from the credit crisis, said on June 25 it expects a second-quarter loss.

In response, governments and central banks are tightening banking rules to strengthen the global financial system. U.S. President Barack Obama this month proposed new rules to tighten oversight, while European leaders agreed on a sweeping overhaul of their regulations.

The Basel Committee on Banking Supervision, a member of the Financial Stability Board, will “make an integrated proposal to strengthen the capital and liquidity regime by end-2009,” Draghi said, including requirements to address systemic risk.

Leverage Ratios

The Swiss National Bank on June 18 said UBS and Credit Suisse Group AG must increase the amount of capital they hold in relation to assets to withstand any further losses. The banks should aim for a so-called leverage ratio of at least 5 percent once the crisis is over, the SNB said, meaning the capital base should account for at least 5 percent of the balance sheet total. UBS’s ratio was 2.56 percent at the end of March.

Draghi said as a complement to the risk-weighted leverage ratios of the Basel 2 banking framework, regulators should consider a simpler figure.

“Basel 2 is a very sophisticated way of determining a leverage ratio,” he said. “In the end you come up with a leverage ratio but it’s the product of many different assessments of risk for different categories of assets under different markets conditions. What we are seeing is that markets have a simpler view. They want to look at some number.”