mr meyer reports on lessons from recent global financial crises remarks by mr laurence h meyer, member of the board of governors of the us federal reserve system, before the international finance conference, federal reserve bank of chicago, held on 1 october 1999. * * * on the principle that mistakes teach us as much as, if not more than, successes, i will take this opportunity to consider what can be learned to improve bank supervision and regulation from the financial crises that afflicted so many economies over the past 2½ years. i will consider two episodes – the asian financial crisis and the financial market turmoil surrounding the near - bankruptcy of the hedge fund long - term capital management ( ltcm ). because these episodes are too recent and too complicated to draw many firm conclusions that lead to concrete policy recommendations, part of my objective today is to identify some areas where i believe that further study would be particularly productive. the two crises the details of these two episodes are familiar to everyone here. the floating of the thai baht in july 1997 marked the onset of a period of market turbulence associated with the halting of new funds to and, in most cases, the flight of existing money from, many economies in southeast asia. because many entities in those nations relied on short - term funding in foreign currency for their ongoing operations, the drying up of funding from global financial markets quickly placed serious strains on them. and because the lines between the private and official sectors were often drawn imprecisely, these funding problems for firms soon became the burdens of national governments. such pressures, unfortunately, exposed numerous and substantial flaws in some of these financial systems, including lax lending policies, substantial mismatches in the maturities and foreign exchange denominations of assets and liabilities, seriously deficient standards for disclosure of basic private financial information, hedges based on erroneous presumptions about the correlations among returns, the failure to monitor ongoing loan performance, and the inadequacy of reserves against potential losses. in autumn 1998, we in the major industrial countries were reminded that emerging market economies did not have a monopoly on financial institutions that were inadequate in the task of assessing risks. the effective default of the government of russia on some of its obligations and the travails of ltcm in rebuilding its capital in the face of enormous trading losses – occurring as they did so soon after the crisis in asia – triggered a generalized reassessment of risk - taking by investors and market makers. interest rate risk spreads widened

a later stage. the results of the assessment will be published once finished and prior to the ecb assuming its supervisory role. the ecb will manage and oversee the exercise in close cooperation with the national authorities and with the support of an international consultancy firm. the national authorities will conduct the exercise at the national level, on the basis of data requirements and centrally developed methodology, and may ask for the support of third parties if they deem it necessary. to ensure consistency in execution across banks and countries, quality assurance processes will be in place at every stage. it is in the interest of all that this exercise be rigorous and transparent, so as to fully restore confidence in the european banking sector. bis central bankers ’ speeches conclusions we have in front of us a year “ fully loaded ” – to use the jargon we all use in connection with of the regulatory basel framework. the european union is trying to make a big step forward and we will need the intelligence and best cooperation of all for this great design to be carried out. thanks again to the official monetary and financial institutions forum and to his chairman, david marsh, and to all the participants. i wish all of our visitors a very good stay in madrid. bis central bankers ’ speeches