Mr Heikensten discusses global capital: advantages, problems and remedies Speech by Mr Lars Heikensten, First Deputy Governor of the Sveriges Riksbank, the Swedish central bank to the Institute of International Affairs in Stockholm on 3 May 1999. First a word of thanks for the invitation to talk here about the global financial markets. Many of the questions raised by financial developments in recent years are clearly connected with foreign policy. The crisis in the international financial system that began in Asia in summer 1997 developed, to cite President Clinton, from being just ‘a few small glitches in the road’ into ‘the worst financial crisis in fifty years’. The extensive financial turbulence has fuelled the debate about globalisation and the increasingly integrated world economy. In certain respects it can be said that, compared with the present situation, the degree of economic integration was greater at the beginning of this century. Expanding trade was accompanied by innovations that simplified international dealing. A common currency was available in the form of gold. In the years before World War One the net financial flows between countries, represented by current-account deficits, were even larger than today. In certain periods, moreover, migration was higher than at present. All in all, however, integration is presumably more extensive today. Many more countries are now participating in the global exchange, gross capital flows are larger and market reactions are much swifter. New technology has paved the way for continued integration and is likely to go on contributing to further developments in this direction.

The IMF, the World Bank and the BIS are all involved in this work. Knowledge must be enhanced. The rule systems in many Third World countries must also incorporate bankruptcy legislation, arbitration procedures, and accountancy rules that are fair and transparent. Extensive and well-motivated work on reforms in also in progress in many industrialised countries. The tasks and methods of central banks and financial supervisors are being specified. Many private institutions are reviewing risk models and adapting them to the global reality. Conventional models must be augmented. Supervision also needs to be developed to cover new instruments and types of risk, risks that the Asian crisis has brought to the fore. The Basle Committee is now working to identify respects in which supervision may need to be extended, for instance to create standards for the bank’s transactions with highly leveraged institutions. The problems in LTCM clarified the central importance of this. At the global level, closer coordination of authorities’ work on supervision is being called for; today, such coordination is confined to sectors. A Financial Stability Forum has therefore been set up and consists, at least for the time being, of representatives of the finance ministries, central banks and supervisory authorities in the G-7 countries, together with IMF representatives. The Forum met for the first time some weeks ago. Discussions are also in progress in what is known as the Group of Thirty-Three, consisting of the participants in the G-10 and some twenty emerging market countries.