The most influential financial players around the world have admitted a series of failings in the lead up to the credit crunch, according to a report by the world's most influential bankers, released this afternoon.

The interim report by the Institute of International Finance (IIF) said that the financial industry had indulged in poor risk management and disclosure, badly structured incentive schemes and used widely misunderstood ratings systems. It called for the establishment of a global capital markets monitoring group, which would alert banks to risks developing in markets worldwide.

The IIF, made up of 375 financial services companies, with Deutsche Bank chairman and chief executive Josef Ackermann as its chairman, set up a special committee in the wake of the liquidity crisis. The interim report came two days before the G7 meeting, at which finance ministers and central bank governors will discuss how to re-establish market stability and confidence.

Five committees were set up by the IIF. They found that in the lead-up to last August's liquidity freeze, some banks had gaps in their risk management processes, while at others "aggressive risk-taking decisions appear to have been made despite sound risk management", the report said. Some firms had weak stress-testing practices "which were not sufficiently consistent or comprehensive", it said, and although companies had refined their risk and control systems, they were not fool-proof". "Experience has shown that an environment of increased risk and volatility gives rise to increased risk of 'rogue trader' incidents'," the report added. The IIF is currently looking at new ways to counter the risk of rogue traders.

The IIF said that the originate-to-distribute business model, in which banks sold mortgages in order to securitse them, had created a situation where incentives for the companies and individual employees sometimes encouraged poor underwriting of risk and risk management being ignored.

The bankers also criticised big pay-offs for unsuccessful bosses. "Severage pay packages should be tied to performance," the report said. They called for a monitoring group, made up for 10 to 20 members, that would meet priodically to discuss potential "stress points" in global financial markets and liase with other financial stability groups, creating another level of monitoring for the financial sector.

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