The danger of financial instability in developing nations is a specter "haunting" international financial regulators, Federal Reserve Vice Chairman Alice Rivlin said.
Ms. Rivlin called the danger of economic instability spreading among nations "profoundly scary" at a time when the rapid flow of capital is eroding national borders. Her comments came in a speech Monday to the Institute of International Bankers, meeting in conjunction with the International Monetary Fund/World Bank annual meeting.
"In many cases, the political-regulatory world that polices and enforces these borders is lagging behind ... the dangers of financial instability and market collapse that could intensify human misery if things go wrong," Ms. Rivlin said.
Ms. Rivlin didn't mention the U.S. economy or U.S. monetary policy in her remarks.
She compared the task of controlling financial sector instability to the difficulty of controlling nuclear proliferation. "The problem of reducing systemic risk to the financial system is really more complex. No summit of a handful of superpowers can eliminate these risks to the financial system," she said.
Banking, corporate, and regulatory cultures must adjust, Ms. Rivlin said, and some sort of transnational supervision of multinational financial corporations must be developed.
"I fail to see how you can operate effectively across your various kinds of borders, or how the public can trust you, unless a designated supervisor is supervising your global operation and coordinating the sharing of information among the functional and national supervisors," she told the international bankers group.
That doesn't mean a world regulatory body, Ms. Rivlin said. Rather, it means developing international financial sector expertise among individual country regulators.
It also means the development and adoption of prudent banking standards that keep up with the rapid changes in financial markets.
Ms. Rivlin's comments came as the world's leading central banks were set Monday to unveil the first global standards on banking supervision, aiming to avert economic crises in developing economies. The set of 25 "core principles," approved last week by nations attending the annual meeting of the International Monetary Fund/World Bank, seek to achieve more independence for central banks and supervisory bodies in less developed regions.
"This is a big step for more secure banking worldwide," Bundesbank Councilman Edgar Meister said in an interview. "It is an enormous result."
Surveillance of emerging markets has been a priority for Western financial policymakers since the Mexican economic crisis in 1994, which forced the IMF to assemble a bailout package that gave Mexico the right to tap as much as $50 billion in emergency loans.
Since April the IMF has been publishing its evaluations of individual nations as Press Information Notices. Countries can, however, elect to keep the results of their evaluations confidential. Thailand refused to disclose its IMF evaluation this year, and the subsequent collapse of its currency under speculative attack this summer forced the IMF to put together another, $17.2 billion, bailout package.
The new rules were prepared in April by representatives of the biggest industrialized nations and officials from China, Russia, Mexico, and Thailand. The goal of the banks is to maintain financial stability in global markets where a big loss in one country can hurt banks or securities in another.
The presentation of the principles comes at a time when Southeast Asian economies are still reeling from a slump in their currencies and bond markets. The slump, precipitated when Thailand devalued the baht on July 2, has left Thailand's currency down 29% of its value against the U.S. dollar since the start of the year. The Philippine peso and Indonesian rupiah have both fallen 21%.
Separately, Ms. Rivlin predicted the U.S. effort to update its banking laws, moving very slowly through Congress, will eventually pass. "It will happen, she says confidently," Ms. Rivlin said, poking fun at her own predictive powers. "The legislation will pass, but it may take a while longer."
House Banking Committee Chairman Jim Leach, R-Iowa, sent a letter to House Speaker Newt Gingrich last week that included a number of suggested changes to the financial modernization bill that's now stalled in the House Commerce subcommittee on finance and hazardous material.
For a variety of reasons, banks, thrifts, insurance agents, and stock brokers don't like the measure, which would tear down Depression-era walls separating their respective businesses.
"Financial modernization is happening in the United States, but financial modernization legislation is, at the moment, stuck in the Congress, hung up over what appear to be endless small battles among industries and their regulators," Ms. Rivlin said.
Sooner or later, developments in financial markets will force passage, Ms. Rivlin said. "We will get reform because we have to."
