on shock, that their economic model was incomplete, or worse, has arguably emerged in the region. as a consequence, many of the leaders of these countries and their economic advisors are endeavoring to move their economies much more rapidly toward the type of economic system that we have in the united states. the imf, whatever one might say about its policy advice in the past, is trying to play a critical role in this process, providing advice and incentives that promote sound money and long - term stability. the imf ’ s current approach in asia is fully supportive of the views of those in the west who understand the importance of greater reliance on market forces, reduced government controls, scaling back of government - directed investment, and embracing greater transparency - - the publication of all the data that are relevant to the activities of the central bank, the government, financial institutions, and private companies. it is a reasonable question to ask how long this conversion to embracing market capitalism in all its details will last in countries once temporary imf support is no longer necessary. we are, after all, dealing with sovereign nations with long traditions, not always consonant with market capitalism. there can be no guarantees, but my sense is that there is a growing understanding and appreciation of the benefits of market capitalism as we practice it - that what is being prescribed in imf programs fosters their own interests. the just - inaugurated president of korea, from what i can judge, is unquestionably aware of the faults of the korean system that contributed to his country ’ s crisis ; he appears to be very strenuously endeavoring to move his economy and society in the direction of freer markets and a more flexible economy. in these efforts, he and other leaders in the region with similar views, have the support of many younger people, a large proportion educated in the west, that see the advantages of market capitalism and who will soon assume the mantle of leadership. accordingly, i fully back the administration ’ s request to augment the financial resources of the imf by approving as quickly as possible us participation in the new arrangements to borrow and an increase in the us quota in the imf. hopefully, neither will turn out to be needed, and no funds will be drawn. but it is better to have it available if that turns out not to be the case and quick response to a pending crisis is essential.

from first - mover advantage at mutual funds. leveraged institutions are more sensitive to changes in asset prices. adverse movements in asset prices, margin calls, and higher haircuts may force them to sell assets to obtain cash and delever, affecting other market participants through declining asset prices and increased margin calls. in addition, leverage may closely interact with liquidity risk at mutual funds. open - end mutual funds are characterized by the so - called first - mover advantage : investors can redeem daily from the funds that hold assets that are less liquid, while liquidation costs are borne by investors remaining in the fund. if a decline in bond prices a market - based system is one where securities markets share center stage with banks in allocating capital, in contrast to a bank - based system, where banks play a leading role. - 8leads to sizable fund withdrawals, the first - mover advantage could accelerate redemptions and second - round price declines. in addition, investors may perceive leveraged funds that experience stress as riskier, possibly becoming more inclined to redeem from these funds. this situation could be worse than in the past if market liquidity deteriorates and dealers are less willing to buy and hold bonds in inventory to cushion the price decline induced by fire sales. however, thanks to recent regulation and supervisory changes, including higher capital requirements and stress tests, leverage at the largest intermediaries is much reduced relative to pre - crisis norms - - and, as a result, vulnerabilities from potential fire sale risks are less significant. from this perspective, a small reduction in liquidity from regulatory changes - - even if present, which is not obvious - - may be a reasonable price to pay for greater safety. i will now place changes in liquidity into the broader context of financial stability. tradeoff between liquidity and regulations to achieve a safer financial system it is possible that regulations aimed at correcting vulnerabilities in the financial system - - like the supplementary leverage ratio, together with other factors - - have altered the business model of dealer firms and, thus, liquidity. while the evidence for a reduction in market liquidity is far from clear, let us for the moment accept this possibility and consider the potential effects on financial stability. regulatory changes, even those that may have reduced market liquidity, likely have enhanced financial stability on balance. recent evidence indeed points in favor of enhanced financial stability. regulatory capital ratios for banks and insurance companies remain high, which,