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Basel Banking Committee Chief Sounds Cautious Note On Hedge Funds

by Ulrika Lomas, for, Brussels

28 November 2005

Jaime Caruana, Chairman of the Basel Committee on Banking Supervision, has told Reuters that more transparency is needed in the hedge fund industry given that many banks now have exposure to the lightly regulated industry.

"Efforts to improve the level and the quality of the information disclosed are necessary in order to allow investors and market participants to properly assess the risks they are assuming," Caruana stated.

He urged banking institutions to exercise caution in their dealings with hedge funds, which have come under the spotlight of many regulating institutions because of their unaccountability, despite controlling billions of dollars in assets in the world's markets.

"As banking supervisors, we should emphasize that banking organisations measure and control their exposures to hedge funds accurately," he stated.

While Caruana acknowledged that hedge funds play a positive role by improving the efficiency of markets, he cautioned that there are two sides to the coin because hedge funds often buy risky assets from regulated entities such as banks, which must set aside reserves to cope with any potential loss.

"Hedge funds ... are active players in risk transfer markets, where risks are transferred from credit institutions to other investors. There could be a risk of hedge funds engaging in regulatory arbitrage, leading finally to the financing of high risk profile borrowers," he observed,

The Basel Committee chief also indicated that there will be a renewed push by regulatory authorities to ensure transparency in the offshore world, or, as Caruana put it, "jurisdictions that pose impediments to information flows".

He said that new guidelines are being drawn up to tell banks how to achieve higher ethical standards and promote ethical behaviour, and a part of these rules will deal with the use of special purpose vehicles (SPVs), in an effort to prevent future scandals such as the one that enveloped the Italian firm Parmalat.

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