Authorities have been tested and have established more effective mechanisms for addressing problem bank situations. Financial institutions have undertaken a range of measures themselves to improve risk management practices, operational controls, and core profitability. Some institutions have attempted to comply with international standards, notwithstanding lower domestic requirements. These reforms are especially important in light of the fact that the obligation to promote financial soundness rests mainly with financial institutions themselves. Taken together, these reforms indicate progress toward reduced systemic risk, heightened competition, increased banking services provided to the domestic population, and higher standards of conduct better approximating international standards. Work Ahead Notwithstanding this progress, much work remains ahead. While crises have motivated a great deal of reform in individual countries, and standards are approaching international norms, the international financial system remains a patchwork of varying standards and guidelines. While international disclosure standards have improved markedly in recent years, greater disclosure still is required, particularly with respect to bank asset quality, both in emerging and industrial countries alike. In seeking to make these improvements, however, we should avoid a “checklist” approach which may not address the risks of a given country and may soon become outdated. Improved disclosure will require more than a comprehensive framework. Accounting standards also need to be upgraded to reflect innovations in financial products and risk management techniques. The process of upgrading accounting standards, in turn, would benefit from greater harmonization of accounting standards that would facilitate comparison of global financial institutions and result in more uniform capital standards across countries.

Mr. McDonough discusses the importance of sound financial systems Remarks by the President of the Federal Reserve Bank of New York, Mr. William J. McDonough, at a presentation in Mexico City, Mexico on 22/7/98. Introduction I am delighted to be here today in my second-favorite country in the world to address you on the very timely subject of the importance of sound financial systems. Having worked closely with my friends in the public and private sectors here over the years, I know the importance of these issues to them. Judging by the attendance here today, this interest appears very broad indeed, a positive sign for the continued revitalization and strengthening of Mexico’s banking sector. My remarks today, necessarily, reflect my perspective as president of the Federal Reserve Bank of New York, which supervises the majority of domestic and foreign bank assets in the United States, and as Chairman of the Basle Committee on Banking Supervision, a position I accepted last month. These positions allow me a front-row seat on the wide range of developments taking place in international banking and banking supervision, a perspective which I hope to share with you today. To understand the importance of sound financial systems, one need only look at the impact of financial system breakdowns, of which, unfortunately, there are many recent examples. Indeed, prior to the onset of the Asian crisis, the IMF had estimated that fully three-quarters of its member countries had experienced significant banking sector problems since 1980.