World's Financial Leaders Tackle Surge in Bank Crises
In the past 15 years, a banking crisis has struck somewhere in the world every five weeks or so on average - an unprecedented rate.
The world's financial leaders, meeting here this week, have been dealing with measures to handle them better, and maybe even prevent some future financial messes.
Industrial countries are not exempt from these problems, as Americans well know. Congress has been attempting recently to clean up remnants of the savings-and-loan failures that swept through much of the industry in the 1980s. Republican leaders in Congress and the White House agreed on a legislative package to replenish the insurance fund that guarantees deposits at thrift institutions.
But it was the December 1994 Mexican crisis, ended by a $53 billion international bailout, that set off an alarm over bank fiascos in developing nations.
"Gone are the days when efforts to prevent international financial crises could focus almost exclusively on the industrial countries," notes Morris Goldstein, a fellow at the Institute for International Economics in Washington.
More than 90 percent of nations in Africa, Asia, and those in Central and Eastern Europe moving from communism to capitalism, faced at least one serious bout of banking difficulties during the 1980-96 period, he finds.
These troubles have been costly for the countries involved. One study puts the total cost of resolving the 131 banking crises since 1980 in developing countries at some $250 billion.
Moreover, Mr. Goldstein sees "an increased risk" that the surge of banking difficulties in emerging economies will have bad repercussions in industrial countries, as Mexico's did in the US.
That's because developing countries currently purchase about 25 percent of industrial-nation exports. They receive about 40 percent of global inflows of foreign direct investment in plant and equipment. And they have through their banks $717 billion in outstanding liabilities to banks in the rich countries. That sum is $46 billion more than their claims on those industrial-nation banks, according to the Bank for International Settlements, a bank in Basel, Switzerland, owned by central banks of industrial nations. Often bank liabilities in these poor countries become liabilities of their governments.
Responding to concerns in industrial nations, the International Monetary Fund (IMF) has been setting up standards for statistical data to be provided by developing countries. One reason for the surprising nature of the Mexican crisis, it is often assumed, was the inadequacy and unavailability of some of the nation's economic data. So the IMF earlier this year set up a standard for data to be provided by countries that tap the capital markets, or aspire to do so. Information on those data was made available on the Internet Sept. 18.
On Sept. 29, IMF policymakers reported progress on doubling an emergency bailout fund to about $50 billion.
Further, IMF managing director Michel Camdessus last week asked that the fund's 180 nations double the organization's $200 billion in capital, or at a minimum, increase it by 50 percent. This would be aimed at helping the fund safeguard the world's financial system against banking crises and other developments prompting wild capital outflows.
He also urged creation of 26 billion new special drawing rights, a type of IMF credit that would, in effect, provide $36 billion of free assets, often used in emergencies. The recipients would mainly be developing countries and former communist nations. Approval by parliaments of the two proposals, likely in smaller amounts, could take two years or more.
Goldstein advocates a new agreement on international banking standards to increase the scope and pace of banking reform in developing countries.
A current international agreement on banking supervision, he says, is not designed to deal with the causes of crises in developing countries. The pact should encourage bank capital levels to be higher in countries with riskier environments, and start reducing government interference in banks for political reasons.