Global Financial Crises: Implications for Banking and Regulation
Brewer, Elijah, III, Evanoff, Douglas D., Chicago Fed Letter
On May 6-7, 1999, the Federal Reserve Bank of Chicago held its thirty-fifth annual Conference on Bank Structure and Competition. Since the early 1960s the conference has served as a forum for academics, regulators, and industry participants to debate current issues affecting the financial services industry. This year's conference continued that tradition.
The theme of the conference was "Global Financial Crises: Their Implications for the Financial Sector." Emphasis at the conference was placed on the appropriate means to resolve problems when they occur, and how to avoid them in the future. What appears to have started as a simple currency devaluation in Thailand in July 1997 has seemingly led to a general upheaval in financial markets throughout the world. Suddenly, global capital market integration, which had been credited with enhancing economic growth through the 1990s, was being criticized as the major cause of the crises that have affected well-managed banks and poorly managed banks alike. Thus, the unprecedented global financial crises that followed the collapse of Thai baht raise numerous public policy questions which must be addressed to avoid repeating past problems. What caused the recent crises? What role did financial intermediaries play? Was moral hazard and/or poor regulation an important factor? Are most of the problems behind us? Are current international regulatory arrangements adequate to address these problems? Is a new regulatory architecture needed? Do financial markets no longer "work" in the sense that the crises are simply unpredictable and unavoidable? What is the appropriate public policy response?
To address these and related questions, the conference held a special theme session which included Carter Golembe, president, CHG Consulting, Inc.;John Heimann, chairman, Financial Stability Institute; Allan H. Meltzer, professor of political economy, Carnegie Mellon University; Ernest T. Patrikis, senior vice president and general counsel, American International Group, Inc.; and Andrew Sheng Len Tong, chairman, Hong Kong Securities and Futures Commission. There was also a keynote address by Federal Reserve Chairman Alan Greenspan, and a luncheon presentation by Joseph E. Stiglitz, chief economist of the World Bank, during which they shared their views on these topics. Finally, there was an additional session organized to discuss regulatory reform during which some of the panel members discussed alternative means to prevent future crises.
In his keynote address, Alan Greenspan observed that conditions seem to be improving in the Asian countries most affected by the recent financial crises. Further, productivity increases in the U.S. have served as a buffer against those crises having a major impact on the domestic economy. These comments underscored the necessity to find ways to better manage and to avoid these problems in the future. In his luncheon presentation, Mr. Stiglitz emphasized that the social cost of financial crises can be enormous. Even after financial markets begin to recover, unemployment rates tend to remain high for extended periods of time. There also seems to be a greater impact on less developed countries than other countries.
The origin of the crises
What caused these crises which started in Thailand, engulfed Malaysia,
Indonesia and South Korea, and then proceeded to affect Russia, Brazil, and Argentina, and some would say now seems to been influencing financial activities in Europe? In the theme panel discussion, Andrew Sheng argued that the Asian crisis was the result of a classic asset bubble-overleverage and a boom-bust mentality by investors. John Heimann echoed this impression. Mr. Heimann argued that the bubble was the result of herd behavior by investors. He felt that those investors who rushed into Eastern Asia at the beginning of the decade "with scant regard for risk, bolted in 1997 with scant regard for economic fundamentals. …