G7 leaders may demand rethink of bank business models

By Huw Jones

BRDO, Slovenia, April 5 (Reuters) - Some banks will have to adapt their business models under policy recommendations to be made to global financial leaders at the G7 meeting next week, Dutch central bank chief Nout Wellink said on Saturday.

The Group of Seven industrialised powers meets in Washington on April 11 to discuss a regulatory response to an eight-month old credit crunch that is crimping global economic growth.

"We will come with a long list, a really long list, of recommendations," Wellink, who chairs the global Basel Committee on Banking Supervision, which is part of the Financial Stability Forum that coordinates the G7 regulatory response, said.

The financial market turmoil began last year with defaults on U.S. home loans and rapidly spread through the financial system via complex credit derivative products packaged, bought and sold by the world's major financial institutions.

"What we try to address is the underpinnings of the originate and distribute model. These underpinnings should be strengthened," Wellink said, speaking to reporters at the end of two days of meetings of European Union finance ministers and central bankers in Slovenia.

The "originate and distribute model" is the classic investment banking model of constructing packages of securities and selling them to a range of investors.

Many commercial banks have also moved from the traditional "buy and hold" model to originate and distribute where they distribute credit risk to other market players, often in the form of opaque securitised products.

Some of these securitised products were based on underlying home loans and became worthless when the loans defaulted.