Slump may moderate financial sector reforms

financial crisis in many emerging markets and the current global economic slowdown may moderate the pace of financial sector reforms, according to william r white, economic adviser, bank for international settlements, basel. in his keynote address on the evolving global financial system: some implications for emerging markets, at the indira gandhi institute here on thursday, white said that the international financial system has been in a process of rapid change, with technology and liberalisation being among the primary driving forces. nevertheless, the recent financial crises in many emerging markets and the current global economic slowdown, may in the near term, temper the speed at which further changes are likely to take place he said. white, however, warned that such considerations should not be used as an excuse to roll back the clock in the area of financial sector reform. the efficiency costs of a financially repressed financial systems are simply too great, he said. in his address, white said that one side effect of the new accord could be that internationally active banks may be encouraged to reduce cross border loans in foreign currency and to rely more on locally sourced funds to support local loans. this would be desirable in that it would help to reduce the dangerous problem of currency mismatches. moreover, the domestic presence of well capitalised foreign banks would help to introduce new technology, better working practices, and would increase competition he said. according to white one of the objectives of the new regime is to restrain the tendency of creditors to plunge into and out of emerging market economies. borrowers will have to rely on protecting themselves, as best as they can, against the vicissitudes of volatile capital flows. while full-blown capital controls have little appeal, some restrictive measures that fall short of this may still have some merit, he said. one way of doing this would be to place market-based penalties on short-term inflows as practised by chile. a number of countries have imposed bans on lending domestic currency to foreigners wishing to sell it short. moreover, it is common practice in many countries to prohibit domestic banks from taking net open positions in foreign currency, he said. while volatility of capital inflows would continue to be a longer-term concern, in the immediate term the problem could well be a shortage of external capital than a dangerous surfeit. according to white, the rating-based approach put forward in the new accord could discourage foreign lenders from funding countries with a lower rating as such loans would attract higher capital requirements. but this is not a bad thing according to white. if emerging market economies in fact have relied excessively on foreign debt, particularly the less creditworthy, shortening the rope with which they can hang themselves might well be desirable said white. talking on the limitations of the new accord, white said that there were at least four issues that still need to be addressed. the first one is that of the maturity of the loans and the associated capital required.

Slump may moderate financial sector reforms

FINANCIAL crisis in many emerging markets and the current global economic slowdown may moderate the pace of financial sector reforms, according to William R White, economic adviser, Bank for International Settlements, Basel.

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