Mr Trichet gives an address on the risks and challenges of the international financial scene Text of the Third Hong Kong Monetary Authority Distinguished Lecture delivered by Mr Jean-Claude Trichet, Governor of the Banque de France, the central bank of France, in Hong Kong on 8 July 1999. It is a great pleasure to be here in Hong Kong and I am greatly honoured to have been invited to deliver the Third Hong Kong Monetary Authority Distinguished Lecture. So I would like to thank you for giving me the opportunity to express my views on the challenges and opportunities of the international financial scene. The international financial scene has been faced with two major changes over the last quarters: í  the recurrence of financial crises, originating generally in emerging or transition economies, which has emphasised the need to reform the architecture of the international financial system;  í  the introduction of a new currency, the euro, which should contribute to a balanced international monetary system. FINANCIAL CRISES AND THE REFORM OF THE ARCHITECTURE OF THE INTERNATIONAL FINANCIAL SYSTEM Two major explanations of the recent financial crises have been put forward: í  one which can be called the “fundamentalist” view argues that Asia’s healthy macroeconomic indicators – low inflation, fiscal balance, low government debt, high rates of savings and investment – offered a misleading picture. This view points out that many Asian governments provided implicit guarantees to the banking sector, which often engaged in borrowing abroad and in reckless lending to unqualified borrowers.

The meeting of the G7 finance ministers and central bank governors (held in London, 21 February 1998) called for a “profound and broad-ranging debate on the lessons of events in Asia and their implications for strengthening the international monetary system, building on the reforms initiated at Halifax”. The G7 identified five main areas where progress had to be made. This is not the place to take stock of the proposals that have been put forward. Let me just air a few remarks on certain measures, which I consider as particularly important. I would like to discuss the proposals addressing imbalances and structural distortions in the crisis countries before considering those concerning the international financial markets and institutions issues. Efforts to strengthen emerging countries financial systems making them more resilient to external shocks The main effort contributing to the strengthening of emerging market economies’ banking systems is the adoption of the set of Core Principles for Effective Banking Supervision which have been widely endorsed by emerging countries authorities. The IMF in coordination with the Basel Committee on Banking Supervision is designing indicators to assess progress in implementation by emerging countries. The adoption of the implementation of the Core Principles as a criterion giving access to the newly created Contingent Credit Line is a strong incentive for members to adopt them effectively. The design of Deposit Insurance Schemes is another important measure contributing to reduce or eliminate implicit government guarantees limiting moral hazard on the lenders as well as on the borrowers side.