Banks can rise above the credit crunch on financial markets

 Banks can rise above the credit crunch on financial markets by restructuring assets or simply holding on to subprime mortgage investments, European Central Bank Governing Council member Axel Weber said in comments released on Monday. Weber told a weekend meeting of central bankers in Jackson Hole, Wyoming that current market tensions, stemming from the fallout from U.S. subprime mortgage holders defaulting on their loans, were more about liquidity than solvency. “The solution for banks which own conduits is to tap other forms of financing, such as issuing longer-term bonds,” Weber said, according to a transcript of remarks issued by the German Bundesbank, which he heads.

“Since the actual default rates on subprime mortgages are relatively low, compared to the current market pricing of their default risk, marking and holding them to maturity and simply riding it out could be a viable option.” The Bundesbank said reports that Weber had described the current market turmoil as being similar to a classic bank run were “partially misleading”.

In his remarks at the conference, hosted by the Federal Reserve Bank of Kansas City, Weber said that in contrast to the Asian financial crisis, banks’ balance sheets faced a mismatch in maturities, not currencies as well. The market distress means banks and investment funds have had problems rolling over short-term funding lines used to finance investment in longer-term assets such as asset-backed securities.

But Weber said the market for very transparent and clearly-structured asset-backed securities remained liquid. Banks could access this by taking the worst subprime investments onto their own balance sheets and relaunching the investments, he said.