, the imf estimates the cost of rescuing state - owned banks to be nearly 2 % of gdp. in mexico, the overall cost of several programs to support the banking system is estimated ( in present value ) at 6. 5 % of gdp. currently in japan, the government has announced an intention to spend as much as 30 trillion yen, 6 % of gdp, to support its banking system. for finland, chile, and argentina, the imf estimated the fiscal impact of banking crises to have been between 4 % and 8 % of gdp. finally, in the united states, resolution of the s & l crisis is estimated to have cost $ 150 billion, approximately 3 % of gdp in 1990. in addition to the cost imposed upon society, an unsound banking system cannot carry out its credit - creation function and can distort macroeconomic performance. unsound banks, ones with sufficient liquidity but a high percentage of nonperforming loans and a deteriorating capital base, act on a different set of incentives than do sound banks. first, unable to declare loans in default unless they admit their own insolvency, such banks may continue to lend to nonperforming borrowers or, alternatively, capitalize unpaid - and uncollectible - interest. that is, they may act to defer recognition of their problems. at the same time, they might seek riskier investments to try to offset their problems with higher earnings. in addition, such banks may attempt to attract depositors by paying higher interest rates than their solvent competitors. a high percentage of nonperforming loans may also lead to a contraction of credit, a “ credit crunch, ” as banks turn away sound borrowers in order to continue to support unsound ones or unduly raise underwriting standards in fear of making more weak loans. finally, a banking system that is unsound cannot perform its role as a transmitter of monetary policy. particularly in emerging economies, in which other financial markets are not well developed, banks transmit monetary policy by expanding or contracting their balance sheets, i. e., engaging in more or less lending. an economy which is relatively stagnant cannot easily recover using monetary policy if it is saddled with an unsound banking system, because efforts to stimulate growth by lowering interest rates may not lead to a sufficient expansion of lending. [UNK] in an international context with cross - border lending, the same issues may apply. banks that are saddled with

mr. ferguson discusses the role of banking in the global market - place remarks by mr. roger w. ferguson, jr., a member of the board of governors of the us federal reserve system, before the urban bankers coalition, inc., in new york on 4 / 16 / 98. are banks safe for the world and is the world safe for banks? thank you for your kind invitation to speak to you this evening. your topic, banking in the global market - place, is obviously timely. given the role of international capital flows, i expect that this is a topic that will continue to be the focus of a great deal of attention. the current crisis in asia, which is both a banking crisis and a macroeconomic crisis, is the starting point of my talk this evening. as i considered the asian crisis, i became curious to know whether it is a unique problem due to a unique set of circumstances, or an accident that happened in a few asian countries this time, but could occur in other countries at almost any time. i would like to share with you the results of my inquiries. banks continue to be important in a global context the starting point of my research was to confirm the critical role banks continue to play in global finance, particularly for countries with relatively underdeveloped capital markets. for example, the bank for international settlements estimates that the stock of international bank loans had grown to $ 8. 5 trillion at the end of september 1997 - almost 30 times the level 25 years earlier. importantly, loans to developing countries now total about $ 1 trillion. while it is true that international bond and equity flows have grown during the period, new issues of bonds only exceeded bank lending 10 years ago, and the stock of outstanding loans is still considerably greater. this flow of capital has been critical in increasing the standard of living around the globe. funds have flowed internationally from savers to borrowers, who generally tend to be entrepreneurs and others in business who need capital to build businesses and serve customers, both in their home countries and overseas. this international flow moves capital toward its most productive use, in principle, from the higher saving industrialized world to the high return, capital - short developing nations. are there issues that should give us concern in this benign picture? unfortunately, there are many. i would like to turn now to the question of whether banks are safe for the world economy and if the world economy is safe for banking. are banks safe for the global economy? the current crisis