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THE WHITE HOUSE
Office of the Press Secretary
(Cologne, Germany)
| For Immediate Release |
June 18, 1999 |
FACT SHEET
Strengthening the International Financial Architecture
Last October, in the wake of severe financial crises in Asia and Russia that sent
shockwaves around the world, G-7 leaders committed to work to prevent financial
crises and better respond to them when they occur. Leaders have now agreed on new
steps to strengthen the international financial architecture:
Stronger International Institutions and a Greater Voice for Emerging Markets
The IMF now has more powerful tools to prevent and respond to systemic crises -
large-scale, fast disbursing financing and the new line of credit (CCL) to protect
countries with sound policies from financial contagion. These create strong
incentives to implement good policies.
Finance ministers will establish an ongoing dialogue among systemically important
countries. This dialogue will include emerging countries to reflect the fact that
tremors in their financial markets now reverberate in major markets around the
world.
Because capital flows are global but financial regulation still rests with
individual countries, we created the new Financial Stability Forum to bring
together international regulators and G-7 authorities and to anticipate steps that
will be needed to tackle new risks. We will expand membership in the Forum to
include more key financial centers.
We agree to strengthen the IMF and the World Bank.
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Already, countries are asking the IMF how they should strengthen their
policies to qualify for the new CCL -- even countries that do not face
immediate danger. The incentives are working.
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Enhancing transparency
Strong comprehensive standards for disclosure by governments and financial
institutions will help reinforce market discipline.
Never before were details of IMF economic programs and policy-making discussions
available to the public. Now, much of this will be public, along with much more
data on countries.
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During the Asian crisis, investors often fled after learning that countries
had compromised their reserves through forward sales or by lending them to
domestic banks. New disclosure rules will reveal such actions quickly,
discouraging such steps in the first place.
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Stronger Regulation in Lending Countries
A stronger Basel Capital Accord to make capital charges better reflect the real
risk of lending, together with more focus on risk management, will encourage banks
to lend more prudently.
New measures -- including greater transparency and sounder practices by lenders --
will address problems raised by hedge funds and other highly-leveraged institutions.
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Before the crisis, international banks making short-term loans to Indonesian
banks had to set aside the same amount of capital as they did for loans to
Citibank. Suggested revisions to the Basle Capital Accord would require them
to retain from two and a half times to five times as much - discouraging risky
debt accumulation.
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Equipping Emerging Market Economies to deal Better with Risk
Weak financial sectors and heavy reliance by firms and governments on short term
borrowing proved a dangerous combination. Global standards and guidelines for
stronger policies and stronger regulation -- in areas ranging from debt management
to corporate governance to insolvency regimes -- will encourage better policies.
New policies will promote more sustainable exchange rate regimes.
Capital flows offer tremendous benefits, but they also bring risks. The new
consensus on liberalizing capital flows emphasizes the importance of strengthening
financial systems and prudential safeguards.
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Removing incentives to seek short-term capital, encouraging countries to fund
themselves at longer terms, and introducing prudential safeguards on bank
borrowing will discourage the buildups of short-term debt that proved so
critical for countries like Thailand, Indonesia, Korea, and Brazil.
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Sharing Responsibility for Crisis Resolution
A new framework sets out the range of approaches the official sector will take in
facing crises - the principles that will guide decisions and the tools that will be
used. This promotes appropriate "bailing-in" of private sector lenders and should
help prevent contagion.
New measures -- including provisions for better debt management -- will help
insulate countries from market shocks and help prevent shocks from becoming full
blown crises.
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The new framework should reduce the risk that investors will lend in the
expectation that the international official community will protect them from
adverse outcomes. Investors should make better decisions if they understand
the framework for official action.
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