Citi's Pandit suggests new way to gauge risk

To protect the international financial system, regulators should rely more on a benchmark portfolio as a tool to guard against excessive risk-taking, rather than the capital standards now in use, Citigroup Chief Executive Vikram Pandit said on Friday.

Pandit said that capital rules, such as the international Basel agreements, are not transparent and do not give investors a good idea of how much risk a bank is facing.

Pandit said that under the current capital rules it is difficult to tell whether two banks who claim to be meeting the same standard are 'equally risky'.

"You don't know how to calibrate risk because you don't know enough about what those underlying assets actually are nor how that risk is measured," Pandit said Friday to a Bretton Woods Committee meeting in Washington.

Pandit said a better way for making sure the financial system is sound would be to create a benchmark portfolio that banks and other financial institutions would measure their own portfolios against.

He said those results should be disclosed publicly.

"Knowing how a company's risk measurements perform against this benchmark portfolio will tell the world how its management thinks about risk, and therefore just how conservative or risky its own portfolio probably is," Pandit said. "As importantly the benchmark portfolio allows for the kind of 'apples to apples' comparison that the current approach does not provide."

Pandit also said at the event that US banks' exposure to the European debt crisis is "extremely manageable."

If the situation relating to concerns about sovereign debt and European banks were to get much worse the result would likely be a "demand shock" that will hurt the economy, he said.

"The fact is that we should all expect some sort of a GDP impact if you have a demand shock that's that significant," Pandit said.

Large banks are lobbying intensely against new international capital rules that would require the world's largest banks to meet a higher capital standard than their smaller competitors.