Bini Smaghi Says Banks Must Start Lending Again to End Crisis

By Gabi Thesing

Oct. 12 (Bloomberg) -- European Central Bank executive board member Lorenzo Bini Smaghi said banks need to begin lending to each other again to help end the crisis they helped foster.

``The banks are largely responsible for the mess we're in, they have to be responsible for getting us out of it,'' Bini Smaghi told a group of businessmen in Washington today.

Finance chiefs from the Group of Seven nations established guidelines on Oct. 10 for combating the credit crunch, while falling short of adopting new initiatives. European leaders meet today in Paris to forge a new set of measures to combat the credit freeze after their failure to act a week ago contributed to the worst sell-off in the region's stocks in two decades.

``The meeting will be a premiere, it could bring a common line of action,'' he said. ``There is a commitment not to let banks fail. It should provide a basis to restore confidence.''

Still, government commitments to bail out lenders and central bank moves to flood markets with cash ``may not be enough,'' Bini Smaghi said. ``We need to convince banks to lend to each other.''

Global policy makers have so far failed to reverse a credit crunch even after cutting interest rates and pumping cash into banking systems. Economists at Royal Bank of Scotland Group Plc yesterday predicted the ECB may reduce rates again before its governing council's next scheduled meeting on Nov. 6.

The ECB lowered its key lending rate by half a point to 3.75 percent as part of a global interest-rate reduction on Oct. 8. The same day the bank also said it would provide banks with unlimited funding every week at the new benchmark lending rate.

Guaranteeing unlimited access to cash ``is going to have a huge impact on how banks finance themselves,'' Bini Smaghi said.

At the same time, all these packages ``will take time'' to calm the markets, he predicted. ``The markets are inundated with news these days'' and tend to ``react in a strange, negative way,'' Bini Smaghi said. ``Markets need time to understand some of these.''

To contact the reporter on this story: Gabi Thesing in Washington at gthesing@bloomberg.net.