they see ( often dimly ) as only prospective. reality eventually replaces hope, but the cost of delay is a more abrupt and disruptive adjustment than would have been required if action had been more pre - emptive. increased transparency for businesses, financial institutions, and governments is a key ingredient in fostering more discipline on private transactors and on government policymakers. increased transparency can counter political bias in part by exposing for all to see the risks to stability of current policies as they develop. under such conditions, failure to act would also be perceived as having political costs. i suspect that recent political foot dragging by governments in both developed and developing countries on the issue of greater transparency is credible evidence of its power and significance. transparency, which is so important to foster safe and sound lending practices, is, of course, less relevant for local currency lending if banks are guaranteed with sovereign credits. moreover, transparency becomes especially difficult to create for organizations and corporations with large interlocking ownerships. cross holdings of stock lead too often to lending on the basis of association, not economic value. the list of problems that must be addressed to achieve balance in our future global financial system could be significantly extended, but let me end with a notion that is relevant also to today ’ s crisis. it is becoming increasingly evident that supervision and regulation should address excess nonperforming loans expeditiously. the expected values of the losses on these loans are, of course, a subtraction from capital. but since these estimates are uncertain, they embody an additional risk premium that reduces the markets ’ best estimate of the size of effective equity capital even if capital is replenished. it is, hence, far better to remove these dubious assets and their associated risk premium from bank balance sheets, and dispose of them separately, preferably promptly. * * * as a consequence of the unwinding of market restrictions and regulations, and the rapid increase in technology, the international financial system has expanded at a pace far faster than either domestic gdp or cross - border trade. to reduce the risk of systemic crises in such an environment, an enhanced regime of market incentives, involving greater sensitivity to market signals, more information to make those signals more robust, and broader securities markets - coupled with better supervision - - is essential. obviously appropriate macro policies, as ever, are assumed. but attention to micro details is becoming increasingly pressing. nonetheless, it is reasonable to expect that despite endeavors at risk containment and prevention the system may fail

. in an environment of weak financial systems, lax supervisory regimes, and vague guarantees about depositor or creditor protections, bank runs have occurred in several countries and reached crisis proportions in indonesia. uncertainty and retrenchment have escalated. the state of confidence so necessary to the functioning of any economy has been torn asunder. vicious cycles of ever rising and reinforcing fears have become contagious. some exchange rates have fallen to levels that are understandable only in the context of a veritable collapse of confidence in the functioning of an economy. a similar breakdown was also evident in mexico three years ago, albeit to a somewhat lesser degree. in late 1994, the government was rapidly losing reserves in a vain effort to support a currency that had come under attack when the authorities failed to act expeditiously and convincingly to contain a burgeoning current account deficit financed in large part by substantial short - term flows denominated in dollars. these two recent crisis episodes have afforded us increasing insights into the dynamics of the evolving international financial system, though there is much we do not yet understand. with the new more sophisticated financial markets punishing errant government policy behavior far more profoundly than in the past, vicious cycles are evidently emerging more often. for once they are triggered, damage control is difficult. once the web of confidence, which supports the financial system, is breached, it is difficult to restore quickly. the loss of confidence can trigger rapid and disruptive changes in the pattern of finance, which, in turn, feeds back on exchange rates and asset prices. moreover, investor concerns that weaknesses revealed in one economy may be present in others that are similarly situated means that the loss of confidence can quickly spread to other countries. at one point the economic system appears stable, the next it behaves as though a dam has reached a breaking point, and water ( read, confidence ) evacuates its reservoir. the united states experienced such a sudden change with the decline in stock prices of more than 20 percent on october 19, 1987. there is no credible scenario that can readily explain so abrupt a change in the fundamentals of long - term valuation on that one day. such market panic does not appear to reflect a simple continuum from the immediately previous period. the abrupt onset of such implosions suggests the possibility that there is a marked dividing line for confidence. when crossed, prices slip into free fall - - perhaps overshooting the long - term equilibrium - before markets will stabilize. but why