A committee under the auspices of the Bank for International Settlements has released a report urging banks to take more care in dealing with hedge funds, the Bank of Japan said Thursday.
The report from the Basel Committee on Banking Supervision recommends that banks doing business with highly leveraged institutions (HLIs), including hedge funds, establish sound risk management procedures, such as setting credit limits and conditions for cancellation of transactions.
The BOJ will distribute the report to financial institutions in Japan, but does not plan to tighten regulations at the moment on banks’ dealings with hedge funds, BOJ officials said.
The committee began studying banks’ relationships with HLIs in the wake of the near-collapse in October of Long-Term Capital Management, a prominent hedge fund in the United States.
HLIs are large financial firms that utilize credit to take positions far in excess of their asset base and are subject to little or no direct regulatory oversight and disclosure requirements. They include hedge funds, which are private investment partnerships that pool money from institutional investors and wealthy individuals, as well as some banks and securities houses.
U.S. financial authorities recently announced that U.S. financial institutions incurred losses of $14.4 billion and European ones $10.1 billion in 1998 through transactions with hedge funds. Seven Japanese institutions, including Sumitomo Bank, suffered combined losses of at least $2.9 billion the same year.