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International Financial Architecture

International Financial Architecture


(I) Introduction:
After several years of relative global economic tranquility, the second half of 90s
was racked by a series of currency crisis, The crisis were as follows: !" The Asian #risis of $uly % !99&' (" The )ussian )ubles #olla*se in August % !99+' ," The fall of the -ra.ilian )eal in $anuary % !999'

(II) Asian Crisis of July 1997


The roots of Asian crises e/tended from a fundamental change in the economies of
the region i'e' the transition of Asian countries from being net e/*orters to im*orters' The ra*idly e/*anding economies of the 0ar 1ast began im*orting than they were e/*orting, requiring ma2or net ca*ital inflows to su**ort their currencies during 90s' As long as ca*ital inflow was there currencies were stable, but if this inflow sto**ed then the govt would not be able to su**ort their fi/ed currencies' The most visible roots of the crisis were in the e/cess of ca*ital inflows into Thailand in !993 and !99&' Thai banks, firms and finance com*anies had ready access to ca*ital and found 45 dollar denominated debt tat chea* rates' -anks continued to e/tend credits as long as the ca*ital inflows were there, the banks, firms and government were able to su**ort these credit e/tensions abroad' After some time, the Thai -aht came under attack due to the countrys rising debt' The Thai govt intervened in the foreign e/change markets directly to try to defend the -aht by selling foreign reserves and indirectly by raising interest rates' This caused the Thai markets to come to a halt along with massive currency losses 6 bank failures' -y 7ov !99& -aht fell by ,+8 against 459' :ithin days, other Asian countries suffered from the contagious effect from Thailands devaluation' Taiwan followed with !;8 devaluation' <alaysian )ingitt fell by (+8, =orean won by !+8, the only currencies that were not severely affected where >= ? and #hinese renminbi' The Asian crisis was more than 2ust a currency colla*se'

(III) Develop ent ! "ost Crisis:


The international financial crisis that occurred in Asia resulted in the im*erative need
for strengthening the architecture of the @nternational 0inancial 5ystem' The im*ortance of these efforts was first given *rominence in !99; at the >alifa/ summit of heads of state and government of A-& countries' @n res*onse to the crisis in Asia, 0inance <inisters 6 #entral -ank Aovernors from a number of systemically significant economies met in :ashington 9# in A*ril 9+ to e/amine issues related to the stability of @05 6 the effective function of global market 9uring these discussions the finance ministers 6 governors stressed the im*ortance of strengthening the @05 through action in the following three key areas namely: #ecture $otes ! "rof% &ahul 'hah ((): ) *91 9+,+- 7.7,/

International Financial Architecture 1nhancing Trans*arency and Accountability, 5trengthening 9omestic 0inancial 5ystem, <anaging @nternational 0inancial #risis' (a) 0nhancin1 2ransparency and Accounta3ility: The working grou* on trans*arency 6 accountability considered the contributions of trans*arency 6 accountability that can make im*rovements in economic *erformance as well as the nature of information needed for effective trans*arency 6 accountability' <embers attached *articular im*ortance to enhancing the relevance, reliability, com*arability 6 understandability of information disclosed by *vt sector' They recommended that *riority be given to com*liance with and enforcement of high quality accounting standards' There were consensus on the need to im*rove the coverage, frequency 6 timeliness with which data on foreign e/change reservesB e/ternal debt and financial sector soundness are *ublished' @t was recommended that consideration be given to com*iling 6 *ublishing data on international e/*osures of investment bank, hedge funds 6 other institutional investor Trans*arency is an im*ortance means of enhancing the *erformance and *ublic accountability of international financial institution' @t was recommended that @<0 *re*are a Trans*arency )e*ort summari.ing the e/tent to which an economy meets internationally recogni.ed disclosure standards' (3) 'tren1thenin1 the Financial 'yste s: The working grou* on strengthening financial systems sought consensus on *rinci*les and *olicies that foster the develo*ment of a stable, efficient financial system' <embers identified several areas such as #or*orate Aovernance, )isk <anagement including liquidity management" 6 5afety 7et arrangements, where standards of sound *ractices need to be enhanced or develo*ed' The re*ort outlines elements that such standards might contain 6 suggested ways forward' <embers em*hasi.ed that the im*lementation of sound *ractices is best fostered through market based incentives backed by official sector actions' The need for cor*oration 6 coordination among national su*ervisors and regulators 6 international grou*s 6 organi.ations are crucial to the strengthening of domestic financial systems' (c) (ana1in1 International Financial Crisis: The working grou* on the above e/amined *olicies that could hel* to *revent international financial crises and facilitate the orderly and coo*erative resolution of crises that may occur in the future' <embers stressed the need to encourage better management of risk by the *ublic and *rivate sectors and it was recommended to clarify, limit the sco*e of guarantees that governments offer' 1ffective insolvency and debtor- creditor regimes were identified as im*ortant means of limiting financial crises and facilitating ra*id and orderly workouts from e/cessive indebtedness' #ountries should make all efforts to meet the terms 6 conditions of all debt contracts in full and on time' 4nilateral sus*ensions of debt *ayments are inherently disru*tive' #ecture $otes ! "rof% &ahul 'hah ((): ) *91 9+,+- 7.7,/

International Financial Architecture

The above meeting had various *artici*ating nations vi.' Argentina, Australia, -ra.il,
<alaysia, $a*an, @ndia, @<0, :orld -ank, >ong =ong, 5inga*ore, 5outh Africa, Thailand etc'

#ecture $otes ! "rof% &ahul 'hah ((): ) *91 9+,+- 7.7,/