Financial Stability Forum delivers grim assessment

(For more stories from the Tokyo G7 meeting click [G7/G8])

By Gavin Jones

TOKYO, Feb 9 (Reuters) - Financial regulators and central bankers delivered a grim assessment of the credit market upheaval on Saturday, warning that worse may lie ahead as banks tighten lending and an economic slowdown spreads.

In an interim report to the Group of Seven finance ministers, the Financial Stability Forum cautioned against a rush to regulate into this vicious cycle of credit writedowns, preferring to allow markets-based systems to operate.

But authorities must remain on heightened alert, ready to jump in and impose discipline to the messy repricing of credit risk where necessary, it said. Already the credit crisis has claimed British bank Northern Rock NRK.L as its first victim. French bank Societe Generale (SOGN.PA: Quote, Profile, Research) is embroiled in a rogue trader scandal and huge international banks from Citigroup (C.N: Quote, Profile, Research) to Merrill Lynch (MER.N: Quote, Profile, Research) have resorted to Middle Eastern and Asian funds to bolster their faltering capital.

Policymakers are considering a range of steps to innoculate the world from future bouts of excessive risk-taking, which led to the current credit crisis. Tougher disclosure standards for ratings agencies, strengthened capital standards for banks and better risk management systems were on the FSF's list.