ADB lists reforms to reduce risk of future crises

ADB lists reforms to reduce risk of future crises

MANILA (Reuters): The Asian Development Bank has recommended a
cautious approach to capital account convertibility among other
measures to reduce the risk of a financial crisis similar to that
which has engulfed Asia since July 1997.

It said in its annual Asian Development Outlook that the
crisis had spurred much debate on the need for a new global
financial architecture, but given the complexities involved, it
was unlikely wholesale change could take place.

Nonetheless, the ADB said, some reforms should be pursued,
including:

* Prudent regulation of capital accounts. The bank said many
developing countries would do well to adopt some checks on full
capital account convertibility, citing as an example Chile's move
until 1998 to place 30 percent of foreign borrowings at the
central bank for one year.

It said this equivalent of a tax on short-term borrowing would
help in regulating excessive risk-taking by domestic companies.
It said while integration into the international financial system
should be the aim, "ill-planned liberalization of capital
flows...can result in financial instability."

* Minimum international standards of financial practice,
including corporate governance practices, insider trading laws
and regulations for protecting investors.

* Reforming exchange rate regimes. The ADB said implementing
a floating exchange rate or a currency board would help in
preventing distress to domestic banks and corporations with
overseas exposure.

A floating rate would push borrowers to hedge their debts
while a currency board would eliminate exchange rate
fluctuations, it said, adding: "International financial
institutions can push the agenda of an appropriate exchange rate
regime without any fundamental institutional change."

* A framework for the orderly restructuring of problem debt.

* Encouraging private sector credit lines. The ADB said this
would minimize moral hazard and spread the burden of the
financial crisis by ensuring private investors and banks bear
some of the cost.

* For Asia itself, the ADB recommended the setting up of an
Asia Monetary Fund, which could work as a complement to the
International Monetary Fund.

It said a regional agency could bring in many advantages
including more knowledge about the countries involved, the
ability to exert more peer pressure on problem nations, indicate
more early warning of crises and provide additional resources as
a second line of defense after the IMF.

"These modest proposals do not constitute a new Bretton
Woods," the ADB said.

"However, they could help to reduce the risk of financial
crises and reduce their severity should they occur."