This recognition that it is neither practical nor desirable to see the IMF in a role of Lender of Last Resort has prompted considerable thinking about the nature of private sector involvement in crisis resolution and the modalities of sovereign payments suspensions or standstills. Payments suspensions are in some ways the obverse of recognising the limits on IMF lending. And, reflecting this, sovereign standstills litter history over the last two centuries: in Latin America in the 1820s; among the US states in the 1830s and 1840s; in Latin America again in the 1870s; among the majority of sovereign debtors in the 1930s; and in Latin America once again in the 1980s. All too often in the past, however, sovereign standstills have also been a recipe for chaos and confusion. The recent sovereign defaults in Russia, Indonesia and Ecuador are good cases in point. But looking back over history, it is clear that messy and protracted sovereign standstills are very much the rule rather than the exception. Historical experience with sovereign standstills probably looks quite a lot like corporate experience before insolvency rules were put in place, with the work-out process inefficient and inequitable. I will return to that corporate bankruptcy analogy later on. Against this backdrop, the key issues facing the official community seem to me to be twofold.
The median rating of banks, taking the entire rated G10 population of more than 300 banks, is A1 on the Moody’s scale, or A+ on the Standard and Poor’s scale. This would indicate a near-invisible insolvency probability for such banks over a 1 year horizon. However, this very small insolvency probability does reflect two factors which ideally we would wish to discount. First, the ratings reflect the bank’s actual capital level which will in most cases be significantly above the regulatory minimum. And second, in some cases the rating also reflects the agency’s expectation that public support would be forthcoming for the bank, which of course we would wish to strip out. A more accurate measure of the confidence level established by the Basel 8% would be the “standalone” ratings produced by some agencies, for those banks whose capital is at or close to the Basel minimum. Even on this basis, nearly all such banks are rated above investment grade. The message therefore from this view of the matter is that under the new Accord we should be targeting a minimum level of regulatory capital for our G10 internationally active banks that is at least consistent with an investment grade rating. An alternative way of assessing the regulatory soundness standard would be on a “bottom up” basis, that is by modelling the probability of default arising from a typical credit portfolio if the bank held only the Basel minimum capital.