with which their financial system overcame an early 1990 real estate crisis offers a stark contrast with the long - lasting problems of japan, whose financial system is the archetype of financial intermediation that relies almost exclusively on banks. this leads one to wonder whether east asia ’ s recent problems would have been less severe had those economies not relied so heavily on banks as their principal means of financial intermediation. one can readily understand that the purchase of unhedged short - term dollar liabilities to be invested in thai baht domestic loans ( counting on the dollar exchange rate to hold ) would at some point trigger a halt in lending by thailand ’ s banks. but did the economy need to collapse with it? had a functioning capital market existed, the outcome might well have been far more benign. before the crisis broke there was little reason to question the three decades of phenomenally solid east asian economic growth, largely financed through the banking system, so long as rapidly expanding bank credit outpaced lagging losses and hence depressed the ratio of non - performing loans to total bank assets. the failure to have alternative forms of intermediation was of little consequence so long as the primary means worked. that is, the lack of a spare tire is of no concern if you do not get a flat. east asia had no spare tires. the united states did in 1990 and again in 1998. banks, being highly leveraged institutions, have, throughout their history, periodically fallen into crisis. when these institutions were the sole source of finance, their difficulties often pulled their economies down as well. one can wonder whether in 19th century america, when banks were also virtually the sole intermediary, the numerous banking crises would have periodically disabled our economy as they did had alternative means of intermediation been available. regrettably, even with our best efforts, multiple intermediation buffers and other long - term initiatives cannot be created and implemented overnight. efforts in that direction fortunately are being furthered among a number of emerging economies. in the interim, it is essential that we employ the current period of relative international financial stability to address as best we can some of the more evident short - run potentials for crises. to repeat, we do not, and probably cannot, know the precise nature of the next international financial crisis. that there will be one is as certain as the persistence of human financial indiscretion. we can be reasonably sure that it will not be exactly the same as past crises. crises

to withstand vigorous policy responses to such attacks. however, the institutions of the newer participants in global finance had not been tested, until recently, against the rigors of major league pitching, to use a baseball analogy. these recent crises have underscored certain financial structure vulnerabilities that are not readily assuaged in the short run but, nonetheless, will be increasingly important to address in any endeavor to build formidable buffers against financial stress. among the most important, in my judgment, is the development of alternatives that enable financial systems under stress to maintain an adequate degree of financial intermediation even should their main source of intermediation, whether banks or capital markets, freeze up in a crisis. the existence of multiple avenues of financial intermediation has served the united states well in recent decades, especially during the credit crunch of the late 1980s and more recently when our capital markets froze up in 1998 following the russian default. as i indicated in a world bank / imf seminar last year, for a time following the russian default not even investment - grade bond issuers could find reasonable takers. although federal reserve easing in the midst of this turmoil doubtless contributed to improved conditions, it is not credible that our actions provide the whole explanation for the dramatic restoration of most, though not all, markets in a matter of weeks. the seizure appeared too deep seated to be readily unwound solely by a cumulative 75 - basis - point ease in overnight rates. arguably, at least as relevant was the existence of financial institutions, especially commercial banks, that replaced the intermediation function of temporarily disrupted public capital markets. in the united states, as corporate debt issuance fell under these circumstances, commercial bank lending picked up, helping to fill in much of the funding gap. even though bankers also moved significantly to limit risk exposure, previously committed lines of credit, in conjunction with federal reserve ease, provided an important partial backstop to business financing. conversely, when american banks seized up in 1990 as a consequence of a collapse in the value of real estate collateral, the capital markets, largely unaffected by the decline in values, were able to substitute for the loss of bank financial intermediation. without the availability of financing through the capital market, the mild recession of 1991 likely would have been far more severe. multiple sources of intermediation are not strictly an american phenomenon, of course. sweden, for example, also has a corporate sector with a variety of non - banking funding sources. the speed