As a result many avoidable crises soon may become inevitable. And the problem of contagion, whereby difficulties in one case spread to many, would seem likely to worsen. •  Moreover, a perceived weakening of the international community’s commitment to voluntary, market-oriented approaches and its support for honoring contractual commitments would likely create deep distrust, making it harder to encourage cooperation between debtors and creditors in ultimately resolving the crisis. •  An overly quick recourse to payment suspensions also risks discouraging precisely the types of flows that we should wish to encourage, that is, longer maturities with better risk sharing characteristics, such as long-term bonds and equities. In a crisis, the hottest money leaves first—by definition. It seems counterproductive to seek to penalize those who stay. •  Finally, I would suggest that preemptive attempts to "freeze markets" also undermine market discipline of and ownership by the local authorities. 6  –  Increases and decreases in financial flows, and the fluctuations in pricing that naturally accompany positive or negative trends in policies and economic and financial performance are a reflection of, and act as a natural brake on the development of imbalances. –  But an assertion of control by international community, by preemptively calling a time out, risks diverting attention from the policies of the local authorities. As a result, denial and delay, aggravating factors in almost every crisis, may well continue and be exacerbated.

When supervisors engage in a more active dialogue about those processes, we expect that banks will apply greater resources to identify and analyze more comprehensively the risks that they face, seek more accurate measures of the potential costs of those risks to their businesses, and develop more sophisticated mechanisms to mitigate those risks, including maintaining sufficient capital funds. I must emphasize that the supervisory review of capital is intended neither to replace the judgement and expertise of bank management nor to shift responsibility for capital adequacy to supervisors. On the contrary, the Committee recognizes that bank managers are in the best position to understand and react to the particular risks that their institutions face. Supervisory review seeks to evaluate the quality of management’s judgement. As an added benefit, better dialogue through supervisory review will strengthen supervisors’ understanding of the risks that banks face. When problems do occur, having greater insight into the risk profiles and the control mechanisms in place will help supervisors to understand which institutions are most exposed and enable more rapid corrective action to protect systemic financial stability. Market discipline The third pillar of the new capital adequacy framework, market discipline, is an important ally of official supervision and can create powerful incentives for banks to manage their risks appropriately. Marketplace participants, including investors, creditors, and other financial counterparties, can reward sound management or penalize weak management through their influence on the value of a bank’s equity and debt and on its access to credit.