(Changes headline, adds banker comments, report details)
By Al Yoon
NEW YORK, July 23 (Reuters) - Global banking institutions support "far-reaching" regulatory reforms that include higher capital requirements but warn that rushed judgments could hinder financial market recovery, the Institute of International Finance said in a report on Thursday.
The report comes as governments around the world aim to clamp down on banks that found themselves unprepared to handle the global credit crisis and recession in the past year.
Fears that a meltdown at large institutions would upset the entire global financial system led governments to intervene by injecting capital into banks and flooding the markets with cash.
The group accepted that public intervention was needed to stabilize markets, but said it was now key that governments develop "clear strategies for withdrawal" from the private sector to avoid competitive distortions.
"The main challenge ... is restoring confidence and stability in the financial markets," William Winters, co-chief executive officer of JPMorgan Chase & Co's investment bank, said at an IIF press conference in New York.
The Washington-based IIF, whose members also include top executives from Deutsche Bank AG, Citigroup Inc. and the Bank of China, said in the report that "business as usual" was not an option, and pledged to promote many changes planned by governments to strengthen their collective credibility.
This includes reducing the leverage, or debt-to-capital ratios, at the heart of the turmoil sustained by many financial institutions, the report said. Leverage has been too high, IIF members agree, but they urged that future measures be flexible to account for business models, funding ability and risk profiles.
Consistent guidelines around the world are crucial to ensure a level playing field, it added.
While the report in some ways details an industry mea culpa to the worst financial crisis since the 1930s, the group also stressed that tighter rules could be counterproductive at a time when governments are working to resuscitate slumping economies, as well as financial markets. Firms must be able to generate reasonable returns to be viable, which itself stimulates economic activity, it said.
"Material error in the calibration of new prudential requirements would have major negative effects, not just on the financial industry but on national economies," said the report of the IIF, which is chaired by Josef Ackermann, chairman of the management board at Deutsche Bank.
Winters said the IIF report was "very consistent" with the package of proposed reforms advocated by U.S. President Barack Obama. Both seek to boost capital cushions to absorb losses in turbulent markets, make sure firms have the ability to move quickly out of holdings, and better align compensation practices with long-term goals of shareholders.
The IIF warned that restricting the size of financial institutions would not protect against systemic risks. That said, no firm should be considered too big to fail, and regulators should make it a priority to adopt reforms that allow for the orderly wind-down of any company.
The IIF wants to ensure "the inter-connectedness of financial services companies is well-understood ... so if any firm fails it can be handled. That's the obective," Winters said at a press conference.
The group also said it was concerned that international financial markets would become "fragmented" by national regulatory measures that are not coordinated.
A fear is that a lack of coordination will result in protectionist measures taken from a national perspective, said Walter Kielholz, chairman of Swiss Reinsurance Co.
On capital, the group said the challenge will be to develop ways to determine appropriate levels without overshooting to a point that stands in the way of economic growth. The Basel II framework for setting capital requirements should provide the basis for these judgments, Winter said.
Reforms of securitization markets that provide a huge chunk of funding for mortgages and other consumer lending must also be more carefully considered, the group said. Some IIF views may be at odds with proposed U.S. reforms, such as requiring issuers to keep at least 5.0 percent of the the risk in loans they package into bonds.
A push by regulators to force issuers to retain risks on balance sheets may not achieve goals of higher quality loans, and make securitizations less attractive for firms and more costly in terms of capital, the report said.