Calling global financial upheavals inevitable, Comptroller of the Currency John D. Hawke Jr. said Monday that even the smallest banks need to monitor their international exposure.
"It is a certainty that economic crises will occur in the future and spill over national borders," Mr. Hawke told the Institute of International Bankers. "The challenge is how we go about managing and containing their impact."
Community banks were caught off-guard by the Asian crisis, Mr. Hawke said. Though not creditors to Asian governments or companies, smaller U.S. banks financed domestic farmers and agriculture suppliers dependent upon overseas food exports, he said. When exports fell, these borrowers had trouble repaying loans.
"Many did not appreciate the extent of their vulnerability to external shocks," Mr. Hawke said. "Banks that may have viewed themselves as too small or isolated to worry about such distant developments have had a painful lesson in the reach of the new global economy."
Larger banks may have understood their risks, but still lost money. "Foreknowledge of the risks has not made the losses they've suffered any less painful to their pride, their bottom line, or their reputation with investors," Mr. Hawke said.
In a veiled swipe at lenders to the Long-Term Capital Management hedge fund, Mr. Hawke said banks must walk away from deals when borrowers refuse to disclose key financial data.
"Advancing hundreds of millions of dollars without adequate information, simply because other creditors may be scrambling to provide funds to some group perceived as market geniuses, is not prudent lending," he said. "It is Russian roulette."
Still, Mr. Hawke said, the U.S. banking industry has weathered the global turmoil. "Despite many dire predictions to the contrary, such losses have not to date compromised the overall safety and soundness of our banking system," he said.
Mr. Hawke credited the industry's continued health to globalization and diversification, which has greatly expanded revenue sources. "Commercial banks in this country seem more resilient and more resistant to sectoral downturns than at virtually any time in their history," he said.
Frederik C. Musch, associate director of the Financial Stability Institute, told the group of international bankers that to avoid financial crises, supervisors in developing countries must adopt the Basel Committee's core principles. (The Financial Stability Institute is a joint initiative of the Basel Committee and Bank for International Settlements.)
The principles set standards for credit quality, senior management, capital, bankruptcy systems, and examiner training-all of which were problems in developing Asian countries, he said.
Federal Reserve Board Vice Chairman Alice M. Rivlin said one way to encourage global financial stability is to regularly examine the quality of each country's banking supervision.
Reviews could be conducted by teams of regulators from several countries. They would check for compliance with the Basel core principles for banking supervision and similar types of international regulatory guidance, she said.
Exam reports and grades could be used by the private sector to price credit to those countries, she said. The system would be similar to peer accreditation used by U.S. hospitals and universities, she said.
Reforming the global financial system is "devilshly hard" because too much oversight could discourage bank lending, she said. "There is always the risk of killing with overregulation," she said.