Top U.S. policymakers testified Thursday that the best way to avoid economic crises is to ensure that banks in developing countries are sufficiently supervised and capitalized.
"The failure of some banks is highly contagious to other banks and businesses that deal with them, as the Asian crisis has so effectively demonstrated," Federal Reserve Board Chairman Alan Greenspan told the House Banking Committee.
Treasury Secretary Robert E. Rubin said the Basel capital accords should be updated to require banks to reserve more for short-term loans to developing countries.
"Financial markets need to strengthen their practices of managing credit and market risk-and supervisors need to increase their oversight in this area-in order to dampen investors' and lenders' tendency to underestimate risks in good times and exaggerate them in bad times," he said.
Mr. Greenspan urged foreign governments to adopt best-practices standards for bank regulation, such as requiring banks to disclose more data about their financial health. But under questioning from lawmakers, he rejected suggestions that the United States or an international body impose safety-and-soundness requirements on foreign banks.
"I do not believe we need some internationally coercive structure to get sovereign nations to do what we perceive as the right thing," he said.
Mr. Greenspan also criticized the heavy reliance of governments in developing countries on short-term debt, which is less expensive to raise then long-term debt.
"This shortsighted approach ignores the insurance embedded in long-term debt, insurance that is almost always worth the price," he said.