Top Basel bank watchdog to review risk rules

By Thomas Atkins

ZURICH, Feb 21 (Reuters) - Poor planning and short-sighted risk assessments by banks exacerbated the credit crisis now dogging the global economy, the world's top banking supervisors said on Thursday, promising a thorough review of rules.

The Basel Committee, which groups the world's leading banking supervisors, listed a catalogue of failures by banks -- some which actively resisted reforms -- that left the financial sector surprisingly vulnerable when the subprime crisis hit.

Banks also assumed that they could come to the market at any time to seek funding, which turned out not to be the case as worries about exposure to risky investments made banks wary of lending to each other.

"The extreme liquidity conditions of last summer and resulting difficulties that persist today are vivid illustrations of the critical importance of market liquidity to the banking sector," committee chairman Nout Wellink said.

In the paper, issued on Thursday, the committee said banks had resisted efforts to strengthen so-called stress testing that could have prevented some of the fallout.

As a result, supervisors will intensify demands for stress tests -- a banker's equivalent to war games that model survival scenarios under difficult scenarios -- in an upcoming guide that will set the standards for banking supervisors worldwide.

"The nature, magnitude and duration of the shock across much of the global financial system was not fully anticipated by the financial sector," the paper said.

"Supervisors noted that they had faced considerable industry resistance in advance of the recent episode when they had tried to encourage more rigorous and comprehensive stress testing."