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VIENNA, Sept 15 (Reuters) - Too much faith in ratings agencies and ignorance towards the fact that markets can dry up contributed to the global financial crisis, European Central Bank Executive Board member Gertrude Tumpel-Gugerell said.

"We always come back to fundamentals: credit quality and business practices should be sound," she said during a panel discussion at the SIBOS banking conference in Vienna.

"Too much reliance on ratings agencies seemed to have played a role, the liquidity risk was clearly underestimated."

Tumpel-Gugerell said the crisis also showed that regulators needed to be "holistic" in their approach to the financial system, because of the many links between parts that are regulated, like banks, and parts that are not.

"If you have linkages between regulated and non-regulated systems by loans and committances, you have to look at it in a more holistic way," Tumpel-Gugerell said.

"We have to develop a consistent regulatory regime and see the system as a whole," she added.

However, regulators should avoid letting the pendulum swing too far in the opposite direction and strangle financial innovation by overregulating.

"It is always a trial and error process - we don't want to return to an overregulated system like after World War II," she said. "We have to create innovation in the financial industry but we have to respect regulators' views in good time."

"Central bankers sometimes have to be less popular and listened to in good times," she said.

When asked whether monetary policy contributed to the crisis, she said: "We will have to review the situation, but of course, a sound monetary policy is a precondition to functioning financial markets."

(Reporting by Eva Komarek, writing by Boris Groendahl; editing by Patrick Graham) Keywords: ECB/TUMPELGUGERELL

tf.TFN-Europe_newsdesk@thomsonreuters.com

cmr

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