mr ferguson comments on a number of aspects regarding the convergence of regulatory standards : a work in process speech by mr roger w ferguson, jr, vice - chairman of the board of governors of the us federal reserve system, at the institute of international bankers, washington, d. c. on 6 march 2000. * * * it is a pleasure to be here and to address the members of the institute of international bankers. foreign banks play a critical role in the us financial system, accounting for nearly one - quarter of total us banking assets throughout the 1990s. the federal reserve has consistently supported open us markets for foreign banks and has long recognized the value that you add to our economy and financial markets. conferences such as this provide important opportunities for the banking and supervisory communities to meet with one another and to share our thoughts and concerns. in my comments today, i would like to discuss the apparent motivation for managers to create global financial institutions, which provides the background for a convergence of regulatory standards around the world. i would also like to mention briefly the approach that the federal reserve is taking with respect to foreign banks. finally, i would like to focus on the emerging global regulatory standards, mainly the efforts of the basel committee on banking supervision to revise risk - based capital standards. global consolidation of financial institutions the need for sound and consistent policies and procedures throughout the world has become more important as our financial markets and financial institutions have become larger, more complex, and more tightly integrated. if anyone needs proof of that statement, the spread of the asian crisis during the course of 1997 and 1998 stands as the most obvious example of the growing integration of financial markets. informed researchers would argue that the global consolidation of financial institutions appears to be driven by several factors. originally, globalization probably reflected the desire of banks to serve their domestic customers as those customers themselves expanded overseas. this was probably a defensive measure designed to retain customers and preclude others from making inroads into longstanding customer relationships. for other financial institutions, the motivation for overseas expansion may well have been to fully leverage perceived comparative advantages in important business lines, such as custody, that were characterized by high fixed cost and economies of scale. a related motivation might have been to take advantage of cultural affinity, which itself is another form of comparative advantage. the strong presence of spanish financial institutions in latin america may be the prime example of this motivation. finally, many institutions may have expanded to meet ambitious aspirations for growth that comparatively small local markets might not accommodate. certainly,

those actions resulted in pressures on the federal reserve to reverse course. the fiftieth anniversary of the beginning of the great depression - the crash of 1929 - was observed later during that same month, october 1979. i recall that this anniversary not only rekindled the question of whether such an event could recur but also inflamed sensitivities regarding the effects on unemployment that might stem from the new anti - inflationary action. judging from the fate of earlier attempts during the 1970s to tame inflation in the face of a weakening economy, when short - run considerations appeared to trump policies oriented toward longer horizons, such fears of rising unemployment could have also derailed the reforms of october. in the event, they did not. we owe a tremendous debt of gratitude to chairman volcker and to the federal open market committee for their leadership and steadfastness on that important occasion and for restoring the public ’ s faith in our nation ’ s currency. by the time that i arrived at the federal reserve, in 1987, the task of the federal open market committee had become easier precisely because of the perseverance and success of our predecessors in the turbulent years following october 1979. maintaining an environment of stability is simpler than restoring the public ’ s faith in the soundness of our currency. the task is easier still as we remind ourselves of the stark difference between the long - term prospects of our economy now, in our current environment of stability, and then, a quarter - century ago, before the reforms of that october. in closing, i applaud president poole and his colleagues for organizing this event to reflect upon that critical episode in our nation ’ s economic history. an appreciation of our history is, after all, an invaluable guide to sound policies for a better future.