Financial markets still distorted-BIS exec in paper

FRANKFURT, May 17 (Reuters) - Financial markets have not yet returned to normal while banks de-leverage balance sheets left exposed by faulty risk management, the Bank for International Settlements' (BIS) general manager was quoted as saying.

"The markets are still disturbed to a significant extent," Malcolm Knight told Germany's Boersen-Zeitung in an interview published on Saturday, chiding banks to strengthen their capital base during economic booms to help withstand downturns.

"Banks must build up capital cushions during good times," Knight was quoted saying in the German-language interview.

He took banks to task for failing to properly supervise a trend toward securitisation of debt that accelerated in the late 1990s. "The complexity of these financial instruments surpassed what banks' risk-management could master," he said.

He also said central banks were too slow to tighten credit conditions before the credit crisis erupted last year.

"In retrospect central banks can say that the monetary tightening in 2006 could have been more aggressive," he said.

The Canadian banker has been general manager of the BIS -- the Basel-based central bank for the world's central banks -- since 2003. (Reporting by Michael Shields; Editing by Ron Askew)