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."