that those who argue for the benefits of having a country open to global banking may have the better of the argument. we know, however, that whether foreign banks are a source of stability or fragility depends very much on the market, banking and supervisory environments that they find in the host country. there are conditions that must accompany, or better still, precede a country ’ s decision to participate in today ’ s global banking market. if the participation of foreign banking competitors, either directly or through inter - bank lending, comes with improvements in the underlying bank credit underwriting culture, the capability of bank supervisors, and the degree of transparency, then the benefits of foreign bank participation will eventually emerge. on the other hand, if foreign banks participate in a country in which neither the market transparency, nor domestic banks, nor bank supervisors are prepared to change, i believe that the participation of foreign banks, by itself, will not necessarily be beneficial and could prove to be negative. therefore, entry of foreign banks, either directly or as participants in the inter - bank lending market, without movement to better information, better supervision and better banking, provides access to credit, but not necessarily an increase in macro - stability. to argue the benefits of global banking in the abstract, removed from these required conditions, therefore seems to miss the true focus. lessons from the asian crises let me now turn to the broad - based lessons that the asian crisis teaches us. one of the most important contributing factors to the current financial crisis in many of the emerging asian nations was the weakness of their banking systems, as well as weakness of bank supervision within those countries. it seems clear now that, asian banks, as well as their government supervisors, violated some of the fundamental principles of banking and banking supervision. banks ’ managers had not developed adequate processes for underwriting loans and monitoring their continued performance, or of establishing sufficient and timely reserves to buffer expected loan losses. some of these problems stemmed from lending directed by governments, which led to expectations that the government would support such loans, if needed. but, the primary cause of these credit problems stemmed from banks ’ failure to deploy effective tools of credit risk analysis. the absence of credit risk analysis led to financial structures that were inherently fragile. banking supervisors in these countries proved ill - equipped to compensate for the fragility. poor allocation of credit undermined the prospects for sustained economic growth. some borrowers could not service their loans. as these domestic banks ’ loan portfolios deteriorated and their

mr. ferguson remarks on themes in international bank supervision remarks by mr. roger w. ferguson, jr., a member of the board of the governors of the us federal reserve system, before the international banking conference, federal financial institutions examination council, in arlington, virginia on 20 / 7 / 98. themes in international bank supervision the scope of my introductory remarks for your conference today is broad and touches on a number of topics, some of which will be more fully developed by other speakers later in this seminar. risks and benefits of a global banking system let me start by addressing the question of what value and what risks might arise from having a more global banking system such as the one developing currently. academic and popular literature is full of articles arguing both sides of the case. conceptually, global banking, by which i mean both direct entry and cross - border inter - bank lending, may influence macro - stability in both positive and harmful ways. those who see potential harm argue that trans - national banks stimulate capital flight, particularly in developing markets, and in stressful times may be a source of capital outflows and currency crises. second, some analysts argue that foreign banks may lack commitment to their host country and will flee, or withdraw credit, when faced with problems in local markets or in their home market. a third concern is that the participation of foreign banks may be associated with broader efforts at deregulation and may overwhelm domestic banking supervisors, creating a riskier environment. those on the other side of the debate argue that participation in global banking is a source of stability and improved banking practice. proponents of this view claim that foreign banks may directly bring new and better basic banking skills, more sophisticated management techniques, and products better suited to managing and spreading risk. through the benefits of competition, these commentators argue, local banking skills and services will be improved. in addition, some observers see indirect benefits from the participation of foreign banks. they argue that global banks, as either direct entrants or as inter - bank lenders, may accelerate the development of ancillary institutions, such as rating agencies, accounting and auditing firms, and credit bureaus, which acquire and process information. similarly, banks that participate in many national markets may improve information disclosure about the banks themselves as the foreign banks compete to gain market share by demonstrating their comparatively sound financial condition. finally, the proponents of this view argue that participation by cross - border banks may stimulate improvements in the supervisory and regulatory framework. i believe