Top supervisor says party's over for banks

By Brian Love, European Economics Correspondent

WASHINGTON (Reuters) - Banks will have to accept that regulators demand higher capital provisioning for risk in response to the latest crisis in financial markets, the head of the Basel Committee of bank supervisors said on Sunday.

"They spoiled the party," Nout Wellink, head of the Basel Committee on Banking Supervision, told Reuters in an interview two days after governments of the G7 economic powers announced plans to try to make financial markets less accident-prone.

Among the planned reforms is an increase in the amount of capital banks will need to hold to account for risks posed by some of the more exotic financial instruments that became all the rage during the credit boom which went belly-up in August as a crisis in the U.S. mortgage market snowballed.

"We are still in the process of formulating more precisely our proposals," Wellink said. "The impact of these proposals -- I'm talking here about the off-balance sheet items, I'm talking about structured products and assets in the trading book -- will be an increase in capital requirements."

He declined to set a time for when new capital rules would be put in place but said the authorities were well aware of the need to avoid compounding current strains on banks by raising capital requirements in the middle of a financial storm.

"We are not fools. We do realize there are better moments to introduce substantial increases in capital requirements."

Banks never like such moves and were seeking to convince governments, regulators and supervisors that the best way to respond to the crisis was to let them make improvements on a voluntary basis, Wellink said.

"This is their approach. I think we (supervisors) will go further in certain respects whether they like it or not," he said, adding that regulators need to be more "aggressive" than in the past.