ms. rivlin remarks on lessons drawn from the asian financial crisis remarks by the vice - chair of the us federal reserve system, ms. alice m. rivlin, before the hyman p. minsky conference on financial structure at the levy institute in annandale - on - hudson, new york on 23 / 4 / 98. toward a better class of financial crises : some lessons from asia drawing lessons from the asian financial crisis has become a minor industry, partially offsetting the impact of the crisis on developed economies - - at least for economists. it contributes to conference budgets, airline revenues, bar tabs, and the length of academic resumes. the opining classes can turn almost any bad news into an excuse for more meetings in beautiful settings like bard college. some of the talk has been devoted to the blame game. was the crisis ( or rather the rolling set of interrelated crises ) home - grown, that is, brought on by ill - conceived investment, over - leveraged companies, lax banking supervision and crony capitalism in the borrowing countries? was it the greed, inattention, or herd instinct of the lenders? or was it the inherent instability of international capital flows? did the imf step in just in time to avert total meltdown or did it fail to provide early enough warning? did the conditions imposed on borrowers help restore investor confidence or further undermine it? the quick answer is that all of the alleged culprits bear part of the responsibility. international flows of capital can be unstable - - what flows in can quickly flow out - - and fast. the enormous escalation in the volume of private capital flows, coupled with the advent of simultaneous communication in all the world ’ s markets, has greatly increased the exposure of economies to rapid turnarounds in cross - border flows. decades of rapid growth and apparently unending capital inflow had made the asian emerging markets, until recently known as “ tigers ”, believe they were immune from the reversals of investor confidence that beset other parts of the world and produced an incaution that led to over investment in some sectors, inflated equity and real estate prices, and some ill - thought - out projects, public and private. close relations between companies, banks and governments created false senses of security, as well as uneconomic “ policy ” loans and investments. weak supervision of financial institutions and markets, on top of traditions of secrecy in business and governmental transactions, aggravated the

it as a market risk measure are revealed. 9 ) var has proved unreliable as a measure of risk over long time periods or under abnormal market conditions. the danger posed by exceptional market shocks such as the 2007 – 08 financial crisis or the ltcm crisis in the world markets in 1998 – shocks that are often accompanied by a drying up of market liquidity – can be captured only by means of supplemental methodologies. the potential of var to exacerbate market volatility has also been acknowledged. the herd mentality that is so typical of the financial industry means that market sensitive risk management systems, such as var, actually make markets less stable and more prone to crisis. this is because financial institutions may have to sell assets in the affected classes when markets become volatile in order to keep within the var limits set by senior management ; this depresses market prices even further and increases the volatility and correlation of the risk factors for these assets. this in turn might cause another set of financial institutions to exceed their var limits, forcing them to reduce their exposure by selling still more of the same assets – perpetuating a vicious cycle. 10 ) thus the var measure works well as a risk measure only for markets operating under normal conditions and only over a short period, such as one trading day. potentially, it ’ s a very poor and misleading measure of risk in abnormal markets, over longer time periods, or for illiquid portfolios. also, var, like all risk measures, depends for its integrity on a robust control environment. in many instances of rogue - trading cases, hundreds of millions of dollars of losses have been suffered by trading desks that had orders not to assume var exposures of more than a few million dollars. the reason for the discrepancy is reportedly due to trading desks finding some way of circumventing trading controls and suppressing risk measures. for example, a trader might falsify transaction details entered into the trade reporting systems, by using fictitious trades to balance out the risk of real trades, or by tampering with the inputs to risk models, such as volatility estimates that determine the valuation and risk estimation for an options portfolio. as you would agree, opportunity to carry out such tasks is facilitated by inadequate management oversight arising from lack of appreciation of the importance of the internal controls in trading environment. further, there were instances reported in recent years about management deliberately turning a blind eye to risk measures or to the apprehension of the risk