##y ’ s “ financial instability hypothesis. ” in the case of the asian emerging economies, there was evidence of speculative excesses in financial and real estate markets in some of the countries. there was, in addition, an extraordinary taking - on of risk in the form of enormous leverage in the non - financial sector and in the financing of longer - term domestic investment projects with shorter - term foreign denominated borrowing. the failure to respect risks was not only evident in financial markets and financing practices, but also in the investment decisions themselves. these risks were compounded by poor risk management and inadequate bank supervision and regulation. it should be noted, however, that not all the countries were affected by all of these vulnerabilities or to the same degree. financial sector vulnerabilities often increase during a cyclical upswing, as minsky emphasized so often, setting the stage for the subsequent downturn. but in the case of the asian developing economies, there was also a systemic source of these vulnerabilities : weaknesses in corporate governance and moral hazard associated with implicit or explicit government guarantees. the result was incentives for excessive risk taking. to understand the dimension and spread of the crisis among asian developing economies, we also have to take account of the vulnerability generated by fixed exchange rates in the hyman p. minsky, “ can ‘ it ’ happen again, ” in dean carson, ed., banking and monetary studies, homewood, illinois : richard d. irwin, 1963. presence of volatile international capital flows, the role of market psychology, and the role of contagion effects. financial sector weaknesses, pegged exchange rate regimes and volatile capital flows combined to yield a highly combustible mixture that, with the spark of adverse shocks, resulted in the igniting of currency and debt crises, including the collapse of banking systems throughout the region. the result was both a particularly sharp economic downturn and significant obstacles to recovery, specifically the joint problem of restructuring of the banking systems and resolving the excessive debt in the nonfinancial corporate sectors. the dramatic declines in currency and equity markets in this case were also affected by the sharp swing in market psychology. in part due to a lack of transparency, markets had a hard time sorting out what the fundamentals dictated in terms of exchange rates and equity prices. that made the markets very sensitive to factors that affected confidence in the policies followed by the countries. this meant that prompt and decisive policy action in advance of imf programs was very

was not acceptable. apart from the benefits of a multilateral netting scheme, we also needed a real time settlement system, for its superior characteristics in terms of risk control and simplicity, and because it would be very useful for our liquidity provision mechanisms. in order to perform simultaneously multilateral netting and settlement in near real time, banco de mexico developed and proposed a methodology based on mathematical models and operations research techniques. bis central bankers ’ speeches specifically, we created a linear programming model that linked a network flow problem for money with many network flow problems for securities. in other words, we proposed a model were money and securities constitute a flow through a network of participants. the solution we were looking for could be obtained by maximizing these flows quickly and applying the results immediately to the participants ’ balances. since there are specialized algorithms that solve linear programming problems very fast, we had, in principle, a method to choose a set of transactions with maximum value that could be settled with the available resources. this methodology, however, would, in some cases, settle transactions only partially – for example, instead of settling the 1, 000 cetes that were intended in a transaction, only 990 would be settled – a practice unheard at the time. we broke the mold when we realized that it was feasible to offer participants a simple choice : to operate on the basis of an efficient multilateral netting scheme that would partially settle some operations, or to operate on a gross basis. the intermediaries went for the most efficient solution. and so, thanks to the use of operations research techniques, a new methodology to settle securities in the mexican market was born. with this solution in hand, banco de mexico felt indeval had the capability to develop a system that would : 1. settle under a delivery versus payment scheme. that is, having an unbreakable link between the settlement of a securities transfer and the corresponding payment. 2. settle operations frequently. participants would be able to know, almost in real time, which transactions were settled. 3. make efficient use of the liquidity available for settlement, both in terms of securities and money. we knew from the models developed by banco de mexico that it was possible to implement a system with such characteristics and, more importantly, that this would yield a first class securities settlement system. after intensive analysis, testing and calibration, and with the valuable assistance of the instituto tecnologico autonomo de mexico ( itam ), indeval