Leading U.S. commercial bankers are calling for broad changes in capital markets practices to restore global economic confidence and stave off a credit crunch.
In Washington for the annual meetings of the World Bank and International Monetary Fund, the bankers said that loans will probably not resume flowing to emerging markets unless these countries improve banking supervision, make financial disclosures more transparent, and suffer sanctions for unilaterally flouting cross-border credit agreements.
The bankers also said a shift in development funding toward long-term equity investments and away from short-term bank lending could help contain what New York Federal Reserve Bank President William McDonough called the worst financial crisis since World War II. (See page 2.)
"The critical question is how to recreate confidence," said William R. Rhodes, vice chairman of Citicorp. "It's clear that steps need to be taken to prevent a global systemic crisis."
U.S. and foreign banks have suffered heavy losses in emerging markets, beginning with the collapses of some Asian countries' economies last year, which led to crises in Russia and Latin America. As a result, international credit lines and new lending have been cut back.
The bankers' remarks came at a conference sponsored by the Institute of International Finance, a Washington association of banks and other financial institutions.
Their comments came after a Clinton administration proposal that the Group of 7 industrialized countries set up an emergency standby fund to deal with any further crises. Bankers are particularly worried that large capital outflows from Brazil could precipitate a severe recession in Latin America that could, in turn, trigger a contraction of bank credit and a recession in the United States.
Even as bankers criticized emerging countries for their unsound market practices, foreign government officials hit back at the banks for indiscriminately cutting credit lines even to financially well managed countries.
"We are all being put in the same basket, and for all intents and purposes, (capital) markets are closed to all emerging" countries, said Jose Angel Gurria, Mexico's secretary of finance. "We find it difficult to explain why we have to suffer because of something that happened in Russia."
The government officials and bankers also noted that the growing international credit crunch is prompting some countries to introduce capital controls, worsening an already bad situation.
"The crisis has been exacerbated by some foreign banks' withdrawing credit indiscriminately," said John R.H. Bond, chairman of HSBC Holdings PLC, London. "The banking community has gone risk-averse."
Bankers stressed that they will make every effort to maintain credit flows to countries and borrowers they believe are acting responsibly.
"We need to do our own homework and not act on the basis of what the latest trader is doing," said Bankers Trust Corp. chairman and chief executive officer Frank N. Newman.
But the bankers also underscored the need for serious market reforms in many areas before significant lending resumes.
Referring to a unilateral decision by Russia last summer to default on its domestic bonds and slap a moratorium on payments to foreign banks, Mr. Newman said, "People are worried that any country could behave like Russia.
"There is a lingering concern over whether countries will act responsibly or irresponsibly," he added.
Bankers also warned that there is no single solution to the crisis and that banks alone lack the resources to prevent a further deterioration in global financial markets.
"There is no magic wand," said David A. Coulter, president of BankAmerica Corp. "It is important" that the G-7 industrialized countries "make good on their promises."