To reform the global financial architecture, Treasury Secretary Robert E. Rubin said, the capital flowing into developing countries must be curbed and creditors must be held more responsible for lending decisions.
"The role of the private sector in resolving crises is one of the most complex issues that we currently confront," Mr. Rubin said on Wednesday in a speech to the Johns Hopkins University School of Advanced International Studies. "Yet market discipline will only work if creditors bear the consequences of the risks that they take."
Mr. Rubin urged international bank regulators to quickly update capital rules to better distinguish the riskiness of loans to various sovereign borrowers. "We believe it is critical to create the right incentives for prudent bank credit judgments and lending decisions," Mr. Rubin said.
The President's Working Group on Financial Markets will soon propose requiring financial institutions to disclose more information on loans to other financial institutions, particularly those in foreign countries.
"This will increase market scrutiny over the interbank market ... as well as increase scrutiny of exposure to highly leveraged market participants," he said.
To press offshore financial centers to beef up bank standards and supervision, Mr. Rubin suggested requiring more capital behind bank loans to counterparties operating in these jurisdictions.
Mr. Rubin also recommended steps to reduce excessive leverage. Though hedge funds get most of the attention, some banks and securities firms are more highly leveraged, he said.
"That is why there is a strong case for improving public reporting and disclosure by financial institutions and their creditors, and for tightening risk management practices more generally," he said.
The President's Working Group, which Mr. Rubin leads, "will soon be releasing detailed, concrete proposals in these areas," he said.