Trichet accuses banks of financial gambling

EUROPEAN CENTRAL Bank president Jean-Claude Trichet yesterday told banks to return to their “traditional role of providing a service to the real economy”, accusing them of having focused too much on “unfettered speculation and financial gambling”.

His strongly worded criticism, at a banking conference in Frankfurt, highlighted European policymakers’ fears that the recovery of the financial market is encouraging bankers worldwide to believe life can return to how it was before the crisis.

There is concern that banks’ reluctance to lend to business could stymie the euro zone’s fragile recovery. But Mr Trichet’s comments appeared to be aimed more at preventing the repetition of conditions that led to the crisis.

“Looking back on the years before the crisis erupted, we can see that there was a dramatic shift in focus in large parts of the financial sector – away from facilitating business, trade and real investment towards unfettered speculation and financial gambling,” Mr Trichet told the conference, organised by Germany’s Volksbanken and Raiffeisenbanken.

The global crisis erupted because banks had underpriced risks and systemic risks to the sector were underestimated, he added. “Looking forward, the financial sector will have to return to its traditional role of providing a service to the real economy. This, above all, requires a change of mentality within the financial industry itself.”

Among global policymakers, Mr Trichet has been prominent in arguing for a more robust financial system, with pay linked to long-term not short-term, success. “Our fellow citizens will not tolerate a relapse into excessive risk-taking,” he warned.

Separately, Axel Weber, Germany’s Bundesbank president, forecast a less important role for banks in boosting economies. “In countries where the financial sector has been revealed to be disproportionately large, its share in economic value creation . . . will decline,” he said yesterday. – (Copyright The Financial Times Limited 2009)