Mr McDonough focuses on issues related to his responsibilities as Chairman of the Basel Committee on Banking Supervision  Remarks by Mr William J McDonough, President and Chief Executive Officer of the Federal Reserve Bank of New York, before the Foreign Policy Association Conference on Global Capital Markets and a New International Financial Architecture, held in New York on 17 November 1999. *  *  *  I am delighted to take part this afternoon in the Foreign Policy Association’s conference on Global Capital Markets and a New International Financial Architecture. It is a special pleasure to be here among so many old friends and colleagues. In my remarks today, I will focus primarily on issues related to my responsibilities as Chairman of the Basel Committee on Banking Supervision. First, I’d like to give you a brief update on the Committee’s efforts to implement globally an agreement reached initially in September 1997 on Core Principles for Effective Banking Supervision. Second, I’ll describe the Committee’s work to promote improvements in risk management, including some related lessons drawn from the LTCM episode. Third, I will discuss the Committee’s proposal for a new capital adequacy framework to replace the 1988 Capital Accord and give you some idea of what on our timetable is going forward. Many of these efforts were initiated prior to the Russian financial collapse in the summer of 1998. There is no doubt, however, that all went into significantly higher gear thereafter.
The absence of a sufficiently thorough system of banking supervision and the lack of transparency not only became problematic before the crisis, but also caused confidence problems later on. Fourth, the quality of the assets of the banking system is vital for the soundness of macroeconomic policy. In allocating savings to investment use, the banks should be extremely careful about the risks that must be taken for a variety of reasons. There are five main types of risk that the banking system and of course the appropriate authorities have to deal with: interest risk; foreign exchange risk; maturity risk; loan risk; and market risk. A sound financial system is the best assurance of efficient monetary and fiscal policies. In my view, all four of these factors contributed to the change of foreign perceptions and sentiment and produced a cutback in normal financing (in fact, 95 percent of external flows to emerging market countries come from the private marketplace). This cutback, in turn, weakened the external reserve positions of these countries. Then the combination of weak reserves and a weak financial sector brought on a liquidity crisis. We are now in a position to draw some lessons from the East Asian crisis. First, policy implementation must pursue sound macroeconomic policies in order not to lose the confidence of the markets. And second, four main principles must constantly be kept in mind: •  The currency should not be allowed to appreciate, except as part of a bold anti-inflation program.