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Banks see small improvements amid volatile markets

05/09/08

By Lynne Olver

CALGARY, Alberta (Reuters) - Financial markets are still volatile and fragile, with investors fretting over rumors of major bank losses or large portfolios getting dumped onto the market, Josef Ackermann, chief executive of Deutsche Bank , said on Friday.

But he and other bankers attending a business forum in Western Canada pointed to glimmers of improvement in some parts of the global business, which has been slammed by about $450 billion in credit-related writedowns.

Most types of loans are still available in Europe and in emerging markets, and rising credit default rates are more problematic in the United States than in Europe, Ackermann said during a forum on global banking at the Spruce Meadows equestrian center near Calgary.

But he pointed to the slowdown in the European economy, and said "the real problem is how long and how deep will this slowdown go."

As for financial products hard-hit by the credit crisis, buyers now appear to be emerging.

"Right now, it seems to be that distressed products are seeing some kind of stabilization," Ackermann said.

Gord Nixon, chief executive of Royal Bank of Canada , said capital markets are functioning better today than they were a few months ago. But he also said the industry will have to face higher capital ratios and greater regulation.

Banks with broad geographic coverage and balanced portfolios emerged from the credit crisis with an advantage, Nixon and Ackermann said.

"A diversified, stable funding structure is very important to reduce liquidity risk," Ackermann said.

But former Federal Reserve chairman Paul Volcker told reporters that banks with a wide array of businesses also have profound conflicts of interest.

"You have an institution that's lending, it's trading, it's doing M&A, it's underwriting and it's doing investment management," said Volcker.

"That is a recipe for conflict of interest of a profound sort," said Volcker, who served as Fed Chairman between 1979 and 1987.

"I don't know how you deal with all those conflicts, but I don't think it's unimportant," he added.

But Ackermann, who leads Germany's largest bank, said the diversified model works well.

"It gives tremendous strengths to a bank, and in that sense I think it's a model that continues to be strong," he said.

Bank of Nova Scotia CEO Rick Waugh, who with Ackermann helped craft a key industry report this summer on best practices after the credit crunch, said changes have to be made to investment banks'"originate-and-distribute" model of selling or repackaging products.

There are benefits to combining commercial and investment bank businesses, but Waugh compared it to putting a turbocharger in a new model car without safety gear or a suspension. "We've got to go back, keep the turbocharger, but get new shock absorbers, new safety features."

Costs of extra regulation and beefing up internal risk management will be passed on to customers, Waugh noted.

($1=$1.06 Canadian)

(Editing by Rob Wilson)

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