But in a new and rapidly changing international financial system, the instruments that the international financial institutions have at their disposal seem to be increasingly inadequate. They soon found out that they can no longer use traditional strategies to deal with novel and unprecedented problems thrown up by constantly changing technologies and ever more sophisticated market practices. The striking thing about these problems is that they erupt without much warning and to the surprise of even the most knowledgeable in this field. They are also not specific to individual economies: market liberalisation and globalisation have made them common problems for all economies that wish to play a part in the international financial system. Indeed, with a few economies in Asia going through the same process of financial liberalisation and encountering the same problems, the crisis was characterised as one specific to Asia, hence the reference to the Asian financial turmoil. BIS Review 47/1999  2  But explanations of the financial crisis soon moved from regional to international. Events in Russia and Latin America, the Long Term Capital Management (LTCM) episode, and the subsequent deleveraging of hedge funds soon made it clear that our regional crisis was more than just a problem of a few individual economies not keeping their houses in order. The root of the crisis is in the great increase in the speed, quantity and unpredictability of international capital flows.

Although a delicate balancing act is required, I am confident that this is possible without imposing heavy reporting burdens or infringing too much on proprietary information of individual institutions. In this connection, the proposal by Germany for an international credit register is attractive. The register could collect information on the exposures of international financial intermediaries to single counterparties that have the potential to create systemic risk. For the public sector, the tasks include developing still higher standards for macroeconomic and financial data in emerging market economies, and promoting transparency in the reporting of their holdings of foreign reserves. Greater transparency in the operations of international financial institutions, such as the IMF, is also being pursued. The second approach involves designing an appropriate form of oversight of highly leveraged institutions. The Basle Committee’s report on Banks’ Interaction with Highly Leveraged Institutions recommends indirect regulation in which banks should adopt more prudent policies on the assessment, measurement and management of their exposure to highly leveraged institutions. Other tools of indirect regulation could include the imposition of capital charges on lending to such institutions, raising margin and collateral requirements, and so on. While such indirect regulation, through creditors, should clearly be supported, we need to satisfy ourselves that it is an adequate safeguard against the highly leveraged institutions causing the type of systemic problems in smaller markets when their activities overwhelm these markets. The third approach involves international co-operation to tackle regulatory arbitrage.