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.