ECB's Trichet calls for "change of culture" in banking system

European Central Bank President Jean-Claude Trichet called Wednesday for a "significant change of culture" in the financial system, calling for more transparency as banks learn the lessons of the subprime crisis.

Trichet called for banks to be more open and start thinking more in the long-term because this was the only way of "avoiding contagion, herd behavior and ... the propagation of turbulences in times of difficulty."

Major banks have run up billions in losses after many highly rated investments were shown to be based on risky assets _ U.S. housing loans to people with poor credit.

It is still unclear how far this will hurt the real economy as banks shy away from new risk, tighten conditions and raise prices for loans to businesses and home buyers.

Trichet warned that large euro banks are likely to face lower revenue as banks retrench from risk-taking _ but said the crisis has hit after several years of strong profits left banks able to cope with a downturn.

He repeated a call for banks to "promptly and fully disclose on-and off-balance sheet risk exposures."

Fears that banks are still concealing major losses lead to a bank run on Bear Stearns Cos. that saw the bank's fire sale to JPMorgan Chase & Co.

"I would call for a further significant change of culture at the national, European and global level," Trichet told the European Parliament's economy committee. "I would sum up this cultural change with two words: transparency and anti-cyclicity."

More openness was essential to make sure all market players have a clear picture of what is happening while regulators need to look at financial rules that tend to amplify booms and busts, he said.

He also said financial supervisors should tell banks how to value complex investments that may run up huge losses in the wake of the subprime crisis.

Guidance from auditors and supervisors "is warranted" to improve structured product valuations for illiquid assets, he said. Regulators also need to make sure that banks have enough capital and liquidity to deal with sudden shocks.

Trichet said the role of the euro-zone's central bank was to preserve confidence.

"The solid presence of public institutions like central banks is decisive," he said. "We are the master of our own interest rates, we will do what is necessary."

His words were a defense of the ECB's refusal to cut interest rates _ in line with the U.S. Federal Reserve and the Bank of England _ as the financial system froze as banks became fearful to lend money and take on new risks in the wake of last year's subprime crisis.

They were also a shot against politicians like French President Nicolas Sarkozy who have criticized the ECB's independence and its reluctance to be swayed by governments' concerns about slowing growth and the strong euro.

Trichet said he was "concerned by excessive exchange rate moves" as the euro zone's key lending rate of 4 percent attracts bank depositors and helps keep the currency at a higher value to the U.S. dollar.

But he said the ECB would "absolutely not" change its guideline for euro inflation to stay just under 2 percent even though it hit a record high of 3.3 percent in February.

He also warned that current high price levels will go on for longer than expected and a tight labor market may lead to pay hikes that may cause a price spiral. Inflation was based on higher food and energy prices and would be "more protracted" than expected, he said.

Further price rises for oil and agricultural products would add to high demand and low supply of goods to build pressure for higher inflation _ and new problems could emerge if a rash of pay hikes pushes up prices again.

"Wage growth may be stronger than currently expected as well as the pricing power of firms, notably in market segments with low competition," he warned.

He said it was imperative that all _ governments and trade unions _ meet their responsibility to the greater economy to restrain the "wage-setting" negotiations that could trigger these second-round effects that would worsen inflation.

Uncertainties over economic growth are "unusually high," he said, insisting the euro economy was basically sound and more investments and higher spending should help feed the economy's expansion.