Secondly, there is a need to improve the handling of cross-border crises. Financial crises tend to spread from one country to another. For example, many financial institutions have operations in more than one country. When such an institution experiences difficulties this therefore has an impact in several countries. An example of this is the Belgian bank Fortis and the events relating to the rescue of the bank by the authorities in Belgium, the Netherlands and Luxembourg. Crisis management becomes more effective if contacts and concrete arrangements between the countries are already in place. It also becomes simpler to decide how the costs of crisis management should be divided between the countries concerned. Joint crisis management exercises and a better flow of information between the relevant authorities in the countries concerned also facilitate cooperation in the event of a real crisis. Thirdly, the credibility of the credit rating agencies needs to be restored. They have played a central role in the events of the current financial crisis and their credibility has been seriously undermined. This is, however, an area where it is easy for regulation to go too far. I believe that to a large extent we can and should trust in the ability of the credit rating agencies to develop their evaluation methods and to restore confidence. Some form of registration and supervision may also be needed, but this should not involve intervention in the independent evaluations of the agencies. Fourthly, the deposit guarantee schemes need to be harmonised.
Two particularly important exceptions have been the gradual fixing of the exchange rates between members of the European Union, culminating in monetary union, and the more or less formal policies of the newly industrialised Asian countries and Japan to keep the value of their currencies stable against the dollar. Moreover, the Asian central banks have been accumulating large dollar reserves. For most of the post-war period, the quantity of central bank reserves held by Asian central banks was of the same order of magnitude as the reserves held by the G-7. Over the past 15 years, both Japan and non-Japan Asia have rapidly increased their reserves, which are now nearly ten times as large as the combined reserves of the rest of the G-7. Two thirds of these reserves are in dollars, a much larger proportion than the US share of world output. The counterpart to the Asian bloc’s current account surpluses and acquisition of dollar reserves has been large current account deficits in the US. There is nothing inherently wrong with such ‘imbalances’. In principle, they reflect the use of financial markets to allocate savings from around the world to the most profitable investment opportunities. But there is likely to be a limit to the amount of debt that one country can issue as a result of persistent deficits before investors start to worry about its ability or willingness to repay.