Asian economic crisis shows need for changes

Asian economic crisis shows need for changes

BASEL, Switzerland (AFP): The crisis in Asia underlines the
need for changes in the world financial system, the Bank for
International Settlements said in its latest quarterly banking
report.

The turmoil has also lent a new sense of urgency to addressing
issues of crisis prevention and management, according to the
report being issued on Monday.

"Recent events (in Asia) have underlined the need to adapt the
architecture of the world financial system, which is increasingly
beyond the reach of national regulatory powers," the report
noted.

One need is for improved cooperation between financial and
banking supervisors, the BIS said.

The wave of mega-mergers, alliances in the financial industry
and the restructuring underway in the derivatives market are also
likely to lead to a rethink of supervision and regulation, said
the Basel-based central bankers' bank.

"Compounding these challenges are the pressing issues related
to the advent of the euro (in January 1999), which has
contributed to the process of global financial consolidation and
the transition to the next millennium," BIS said.

In Asia, given the extent of domestic financial weakness, the
size of short-term private sector debt and deep-seated problems
of governance, international rescue packages (by the
International Monetary Fund) could not have been expected to
stabilize markets, the BIS said.

The IMF has arranged multi-billion dollar bail-outs for South
Korea, Thailand and Indonesia, the three economies worst hit by
the wreckage of currencies and stockmarkets which started in the
middle of 1997.

Asian authorities were faced with the difficult dilemma of
reconciling the short-term challenge of restoring market
confidence and the longer-term needs of restructuring their
economies, the BIS said.

"Instances of early (monetary) relaxation have only served to
prompt further exchange rate instability," the BIS said.

Yet, deflationary policies in already depressed economies have
had negative effects on both the banking system and the economy.

"Resolving the Asian crisis will therefore be an important
test of the ability of national and international authorities to
cope with the global interdependence of markets," the BIS
concluded.

Asian exposure

International banks sharply cut their exposure to Asia in the
first quarter of 1998 while boosting their lending to Russia,
according to the Bank for International Settlements.

While the Asian financial crisis is more than a year old,
Russia's economic meltdown sparked by a devaluation of the ruble
only started in August.

The credit cut-back by BIS-reporting banks to Asia totaled 34
billion dollars between January and March in reaction to a new
bout of turbulence in the region, the BIS said in its latest
quarterly international banking and financial market report being
issued Monday.

The "most dramatic" retreats were from South Korea, Thailand
and Indonesia, all three recipients of International Monetary
Fund aid packages.

International lending to South Korea fell by US$16.3 billion
in the period with the country's foreign bank debt at $87.2
billion as of March 1998.

Banks' pullback from South Korea was eased by the exchange of
some $22 billion of short-term claims on local banks into longer-
term loans guaranteed by the government, the BIS said.

Outstanding credit to Thailand fell $8.5 billion in the
quarter to $70.8 billion and to Indonesia it fell five billion to
57.6 billion.

"In all three countries, a sharp contraction in trade credit
and the unwinding of collateralized short-term loans granted
earlier were possibly the most important influences," in the
decline, the report said.

The shrinkage would have been larger had it not been for the
accumulation of arrears, including by institutions taken over by
the authorities pending restructuring, the BIS noted.

As a result, China has become the largest bank debtor in Asia,
to the tune of $90 billion. However, the figure must been seen in
relation to the $70 billion of deposits held by Chinese residents
at foreign banks, which include some of the country's $140
billion in foreign exchange reserves, the BIS said.

Japanese banks staged the biggest overall retreat, whittling
down their foreign assets by a record $244 billion in the period.