WASHINGTON - Risk management practices in many countries' banking systems are inadequate to the challenges of the modern economy, Federal Reserve Board Governor Laurence H. Meyer said in a speech prepared for delivery Thursday night.
Addressing a conference in Bangkok, Mr. Meyer said that in the current economic environment the level of risk facing a bank can change quickly and dramatically. Managing such risk "is fundamental to sound banking and requires, I am afraid, a revolution in many of the world's banking systems," he said.
Without naming any countries, Mr. Meyer cited lax regulators, government-directed lending, and the lack of managerial accountability as current impediments to effective risk management.
Coupled with "credit cultures" in which lending decisions are based on relationships rather than an assessment of the borrower's ability to repay, such conditions create danger not only for the lending institutions themselves but also for regional economies, he said.
Mr. Meyer urged banks in developing countries to begin using some of the measures that U.S. banks have adopted, such as Risk Adjusted Rate of Return and Value at Risk, to assess their own risk profiles.
"Risk exists, and banks must accept risk if they are to thrive and meet an economy's needs," he said. "But they must manage the risks and recognize them as real. Risk matters. Whether or not it is temporarily ignored, it will eventually come out."