Abstract
The following closing note has two objectives: first, a brief summary recalls the principal results of the previous chapters. Second, I will briefly present two debates recently undertaken by the financial community, academics and policy makers. The first discussion focuses on the “homework” that remains to be done by emerging markets in order to overcome their vulnerability towards international financial crisis, while the most recent debate focus on how to improve the international financial system, in which rating agencies could play an important, if not dominant, role.
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References
Chapter 1 gives an extensive survey on causes for financial crises.
For this section please see Bhandari, Haque and Turnovsky (1989); Corbo and Hernandez (1996); Goldstein (1995); IFA (1999, #3); Krugman (1998b); Sachs (1998); Schadler et al. (1993); Stüven (1991); World Bank (1999, p. 137–144) and Wyplosz (1998).
Frankel (1999) emphasises that there is no unique exchange rate regime. Each country has to take its choice depending on its past, its economic size, its openness and its exposure to capital inflows.
In its section “economic focus” The Economist (1999, p. 80) promotes fiscal flexibility in order to hinder pro-cyclical fiscal policy caused by long parliamentary approval procedures or by an up-coming election. Similar to an independent monetary authority, an independent fiscal agency that manages the tax system could work more rapidly and efficiently.
For this section please see Basu (1991); Caprio and Klingebiel (1996a); Dernirgüç-Kunt and Detragiache (1997); IFA (1999, #3); Krugman (1998a, c); McKinnon and Pill (1998) and World Bank (1999, p.144–150).
See for instance King and Levin (1993); Levine (1997) and Levine and Zervos (1998).
Higher interest rates emerge because restrictions on rates are lifted and (foreign) banks apply now adequate risk measures. Higher interest rates will hit firms with high debt-equity ratios. Banks might weaken, because they see their deposit rates raising. Furthermore, higher deposit and lending rates will attract riskier investors and banks will face a higher over-all risk.
A credit boom supports boom-bust cycles of capital inflows and can lead to financial crisis through increasing risk in the banking system.
This is mainly due to the lack of experience in a competitive banking environment, small bank margins and a lack of supervision and risk management.
Radelet and Sachs (1998a, p.41) also emphasise that foreign banks can calm financial crises: “... First, branches of major international banks would have been much less subject to depositor panics (indeed, in Indonesia, depositors fled from Indonesia national banks to the few foreign banks). Second, these foreign banks would have been less likely to withdraw their own loans to local customers than they were to withdraw their cross-border credits to Asian banks. Third, these banks would have raised the general level of competition in the banking system, and would probably have helped to limit the politicisation of bank ownership and bank lending. ...”
For a more detailed discussion please see section 7.2.2.
The IFA task force (1999, footnote 2) describes moral hazard in the context of financial crisis as follows “... By “moral hazard,” we mean the provision of insurance by the official sector that weakens investors’ and borrowers’ sense of responsibility for their own actions.”
Further publications are Basle Committee (1999a; b; c; d); IMF (1999b). Nouriel Roubini’s homepage gives additional reference links (Roubini (1999)).
For this section please see Aizenman (1999); Eichengreen and Rose (1998); Frankel and Rose (1996); Kaminsky and Reinhart (1996); Radelet and Sachs (1998a); Rodrik (1998); Rodrik and Velasco (1999); Sachs, Tornell and Velasco (1996) and World Bank (1999, p.151–162).
For instance, Radelet and Sachs (1998a) and Rodrik and Velasco (1999) have identified the short-term debt to reserves ratio as a robust predictor for financial crisis. They also show that the greater a country’s exposure to short-term debt, the more severe will be the crisis when capital flows reverse.
For articles discussing capital controls please see also Rogoff (1999) who is not in favour of capital controls and Nouriel Roubini’s homepage the section “The Debate on the International Capital Flows. Has Liberalization Gone Too Far? Should We Impose Capital Controls?”.
On the analysis of Chile’s capital controls see the following literature: Budnevich and Lefort (1997); Larrain, Laban and Chumacero (1997); Valdes-Prieto and Soto (1996) and the webside of the Chilean Central Bank: www.B Central.cl.
Rodrik and Velasco ((1999), p. 23) suspect somehow these critics themselves: “... Any claim about the ineffectiveness of capital controls must be tempered by the observation that such policies are vehemently opposed by the vary market participants whose actions the controls are supposed to in uence. Perhaps bankers and arbitrageurs denounce the taxes and ceilings they can presumably avoid with the stroke of a key out of simple public-mindedness, or because of a deep-seated reluctance to break the law. ...”
Rodrik and Velasco ((1999), p. 26) quote Garber (1998) to demonstrate the attempts by financial markets to circumvent capital controls: “... Market sources ... report serious, though as yet unsuccessful, financial engineering research efforts to crack directly the Chilean tax on capital imports in the form of an uncompensated deposit requirement.”
This actually happened in Korea in 1998.
This section is based on the following literature: Basle Committee on Banking Supervision (1999a; b; c; d); Eichengreen and Mathieson (1999); Fernandes-Arias and Hausman (1999); Gavin and Hausman (1999); Hausman, Gavin, Pages-Serra and Stein (1999); Hellers (1999); IFA (1999); Institute of International Finance (1999a; b); Rogoff (1999); Stiglitz (1998); Summers (1999a; b); World Bank (1999, p. 162–170) and Nouriel Roubim’s homepage.
The academic and the financial community participate in the debate actively and independendy. Additionally, the following working groups — though an incomplete list — are also engaged in the discussion: The Basle Committee on Banking Regulation (BIS), The Independent Task Force (Council of Foreign Relations, US), The Working Group on Transparency in Emerging Markets (IIF), The Task Force on Risk Assessment (IIF), The US President’s Working Group on Financial Markets, G7 Working Group, G22 Working Group and working groups within the IMF and the World Bank.
Financial vulnerability should decrease with more transparency, even though some authors (e.g. Rogoff (1999)) stress that transparency might also increase the probability of financial crisis, because problems become more evident.
For this section please see Basle Committee (1999c); Eichengreen and Mathieson (1999); President’s Working Group on Financial Markets (1999a; b).
Critics wonder whether the frequency of quarterly publications would be high enough with respect to the speed of financial markets.
The question remains whether market participants still underestimate their risk exposure, because they believe to hold complete information, even though they might not at all.
Transactions in the interbank market might be difficult to report, but U.S. experience suggests periodic large-position reporting is feasible even in a decentralised environment.
Still, international co-ordination and co-operation of offshore financial centres are necessary in order to succeed in continuous and complete reports.
“Moral hazard” arises when the availability of insurance from the official sector weakens investors’ and borrowers’ sense of responsibility for their own actions.
The penalty must be big enough to ensure that the borrower would never want to exercise the roll-over option under normal market conditions.
Basle I required that banks posses enough capital to cover 8% losses on most loans. Basle II allows for much richer and more sophisticated differentiation across loan classes, with capital reserve ratios reaching as high as 40% in some cases. See also Basle Committee (1996; 1999a; b) and Reisen (1999).
See also IFA (1999); Rogoff (1999); Summers (1999a; b).
Industrial countries must not always bailout developing countries in order to prevent serious financial crisis. If OECD members would open their economies to exports of developing countries, without limiting exports to primary goods, developing countries might have a better chance to diversify their export production and accumulate more productivity increasing activities. (Summers (1999b))
See Rogoff (1999, p. 15) for a detailed discussion.
Rogoff (1999, p. 15) points out that bankrupt state and local governments create the same problem and that “... the Chapter 9 of the U.S. bankruptcy code, which governs municipalities, has proven relatively effective...”.
The FDIC (Federal Deposit Insurance Corporation) is an American institution that ensures debt issuers in the domestic market against default.
Heller (1999) highlights the importance of implementing social nets in developing countries. The Asian crisis has demonstrated that low-income group of the population suffers most radically from disruptions implied by financial crisis. Indirect and long-term investments against financial crisis are the following actions: first, increasing investment in human capital; second, developing a strategy that supports the low-income groups during and after economic shocks; third, constituting social insurances that are cost-effective and do not create distort economic incentives, especially in the labour market; and fourth, establishing pension systems and saving schemes to support changing ageing structures in developing countries.
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von Maltzan Pacheco, J. (2000). Policy Conclusion. In: The Influence of Ratings on International Finance Markets. Gabler Edition Wissenschaft. Deutscher Universitätsverlag, Wiesbaden. https://doi.org/10.1007/978-3-663-09040-3_7
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DOI: https://doi.org/10.1007/978-3-663-09040-3_7
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