Magazine article American Banker

Ex-N.Y. Fed Chief Sees Need for Tighter Credit Standards

Magazine article American Banker

Ex-N.Y. Fed Chief Sees Need for Tighter Credit Standards

Article excerpt

Though E. Gerald Corrigan left his post as head of the Federal Reserve Bank of New York five years ago, he says his "capacity to find things to worry about is undiminished." At the International Monetary Conference in Vienna last month, Mr. Corrigan, now a managing director for Goldman, Sachs & Co., discussed some of his current worries for the banking system. The following is excerpted from his speech.

Asset price inflation in equity prices and real estate is a potential source of instability for financial markets. Let me very carefully elaborate on this point because market corrections, even if large, should not be a source of major, much less systemic concern, but rather are a natural and healthy part of overall market dynamics.

Instability enters the picture when asset price changes produce the fear, or the reality, of credit problems which, in turn, raise the specter of nonpayment in accordance with contractual obligations.

Markets, as we have seen, can handle most eventualities, but when broad- based credit concerns enter the picture, things get very dicey.

That is why, in current circumstances, an extra margin of counterparty credit due diligence is in order and it is also why the persistence of narrow credit spreads may signal potential credit market problems down the road.

The fact that banking systems in so many emerging market countries are under so much stress presents both unusual risks and unusual opportunities. The risks-especially counterparty credit risks, amplified by high levels of nonperforming loans by local banks to local companies-are large and not always easy to monitor and manage.

On the other hand, the business opportunities for international banks- including acquiring or taking stakes in local banks in these countries-can be considerable. Moreover, the technological and managerial transfer growing out of increased foreign bank participation in these local banking markets can play an enormously valuable role in helping to speed the reform and restructuring of banking systems. …

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