Strengthening The Global Financial System: Assessing The Crisis And The Policy Response

The financial crisis that began with Thailand's devaluation in the summer of 1997 exposed significant weaknesses both in the structure of markets in emerging countries and in the crisis‐prevention and crisis‐management mechanisms built into the international financial system. Since then numerous efforts have been made to assess the causes of the crisis, and official institutions such as the Group of 7, the IMF, and the World Bank have laid out an agenda for reform. This article discusses the four cornerstones of the reform program: 1 Encouraging the development of sound, well‐structured banking sectors subject to well‐designed systems of bank regulation and supervision. 2 Ensuring that private institutions have the incentives, governance structures, and internal controls in place to avoid inappropriate risks. 3 Strengthening disclosure requirements to ensure that global lenders and investors have the quantity and quality of information they need to make informed judgments about risks and returns. 4 Ensuring that monetary, fiscal, and exchange rate policies are appropriate and resilient enough to permit emerging market governments to withstand a crisis. As recommended in the article on Indonesia, the author encourages the private sector to make greater use of innovative financing arrangements to manage their risk exposures—for example, through standby lines of credit or pre‐negotiated options that would allow a debtor to automatically restructure its obligations under certain conditions.