Lending Countries A stronger Basel Capital Accord to make capital charges better reflect the real risk of lending, together with more focus on risk management, will encourage banks to lend more prudently. Before the crisis, international banks making short-term loans to Indonesian banks had to set aside the same amount of capital as they did for loans to Citibank. Suggested revisions to the Basle Capital Accord would require them to retain from two and a half times to five times as much - discouraging risky debt accumulation. Equipping Emerging Market Economies to deal Better with Risk Weak financial sectors and heavy reliance by firms and governments on short term borrowing proved a dangerous combination. New policies will promote more sustainable exchange rate regimes.
Capital flows offer tremendous benefits, but they also bring risks.
The new consensus on liberalizing capital flows emphasizes the importance of strengthening financial systems and prudential safeguards. A new framework sets out the range of approaches the official sector will take in facing crises - the principles that will guide decisions and the tools that will be used. The new framework should reduce the risk that investors will lend in the expectation that the international official community will protect them from adverse outcomes. Investors should make better decisions if they understand the framework for official action.