##bearance not become institutionalized, but be tied directly to actions by both bankers and supervisors to address underlying problems. • governments are not good long - term asset managers. prolonged government holding of impaired assets is not likely to enhance their value, nor aid in the restoration of market liquidity. • governments are not good commercial bankers. delayed privatization of nationalized banks always means higher future costs, and usually inhibits fundamental reform. • government - directed lending means future fiscal losses. similarly, efforts to stimulate credit growth by nonmarket forces in the context of a banking crisis at best buy additional time, and usually dig a deeper hole. • foreign investment in domestic financial sectors can yield important benefits. foreign direct investment in the banking sector can provide much - needed capital resources, technology and knowledge transfer, and a more diversified capital and funding base in the event of future economic instability. • financial sectors are only as healthy as their borrowers. without corresponding corporate sector restructuring, financial sector rescue efforts are likely to be necessary in the future. • strong financial systems depend on a reliable and credible legal system. in the absence of a strong legal system, borrowers lack appropriate incentives to repay. • there are no " quick fixes " to financial sector problems. remedial actions need to be evaluated in terms of their short - term efficacy as well as their longer - term implications. • unbalanced financial systems create vulnerabilities. financial systems that are unduly reliant on banks for financial intermediation are likely to be more vulnerable and slower to recover from the onset of weakness. shallow capital markets limit lending alternatives and delay the recovery of financing to the real sector. the challenges can be daunting, but recent experience both within and beyond asia confirms that a dedicated commitment to financial reform contributes to sustainable recoveries and greater crisisresilience. just as strong financial systems act as stabilizers when a domestic economy is battered, weak financial systems amplify the scope and reach of the problems, making bad situations worse. longer - term financial stability while financial sector rehabilitation will remain a key priority for authorities in asia, longer - term measures need to be put in place to deal adequately with the increasingly complex and dynamic international financial marketplace of the twenty - first century. the threats to financial stability are many, and no one set of measures can be expected to ensure against the recurrence of future problems. financial intermediation is a constantly evolving activity, involving new risks, instruments,

william j mcdonough : toward greater financial stability remarks by mr william j mcdonough, president and chief executive officer of the federal reserve bank of new york, at the bank of thailand, bangkok, 5 february 2001. * * * it is my pleasure to accept the invitation of the bank of thailand to speak to you tonight on how we can promote greater financial stability. in the wake of the asian crisis, authorities in the region have done much to promote increased financial stability, through a variety of measures to strengthen domestic banking systems and corporate sectors, and institute broader improvement in accounting, legal, and supervisory systems. thailand has taken a number of such actions, including efforts, among others, to close troubled financial institutions, attract significant private sector capital ( including foreign capital ) into the banking system, and improve the legal framework. macroeconomic policy adjustments, including the move to flexible exchange rates, have also furthered greater stability. these actions have helped countries recover from large - scale banking crises, and restore solid growth generally. that said, in thailand and elsewhere, the recovery is not yet complete, and much remains to be done. moreover, the restructuring and reform agenda will be challenged by slowing global and regional growth, which may contribute to already apparent signs of increasing reform fatigue within the region. in my view, asia stands at an important policy crossroads, involving a choice between pushing forward market - based reforms that are the only way toward long - term financial stability, or pursuing actions that provide short - term relief at the risk of threatening the hard - won gains of the last three years. the recognition that we have entered a new international financial environment has set in motion a range of efforts dedicated to strengthening the new international financial architecture. my remarks today will focus on what i believe can be done, from my perspective, to enhance domestic financial resiliency, within the context of these international efforts, and particularly on two essential building blocks : a strong financial system and a sound and stable macroeconomic environment. my comments reference the experience of east asia, but reflect lessons that are more broadly applicable. overview of recent recovery given the depth of the problem a little more than three years ago, the asian recovery on the whole has been remarkable, and has largely defied initial expectations that the crisis would cast a long shadow over regional growth prospects. the regional recovery has exhibited a solid " v " shaped trajectory supported by strong performance in the external accounts, and a pickup in domestic demand. banking sectors – faced with unprecedented crisis