INTERNATIONAL FINANCIAL STABILITY

1. INTERNATIONAL FINANCIAL STABILITY Presented by Professor Christos Gortsos, Secretary General, Hellenic Bank Association March 2004

2. TABLE OF CONTENTS I. THE RATIONALE FOR REFORMING THE INTERNATIONAL FINANCIAL ARCHITECTURE A.The underlying forces B. The policy considerations of the reform strategy and the means to achieve them II. THE MAIN ELEMENTS OF THE NEW INTERNATIONAL FINANCIAL ARCHITECTURE III. THE BUILDING-BLOCKS OF THE NEW ARCHITECTURE A. The crisis-prevention initiatives of the IMF and the World Bank B. The work of other international institutions and fora

3. I.THE RATIONALE FOR REFORMING THE INTERNATIONAL FINANCIAL ARCHITECTURE A. The underlying factors 1. Increased international capital mobility and volatility • positive aspects • negative aspects 2. Unsustainable exchange-rate regimes 3. Internationalization in the provision of financial services 4. Inefficiencies in national arrangements concerning: • the conduct of macroeconomic policies • the transparency of macroeconomic policy and data dissemination • the supervision and regulation of financial intermediaries and financial markets • institutional and market infrastructures

4. I. THE RATIONALE (continued) A. The underlying factors (continued) 4. Existing asymmetries • Developed vs. less developed economies • Regulated vs. unregulated (offshore) financial centers • Sophisticated vs. unsophisticated financial intermediaries 5. Contagious aspects of financial crises 5.1 Domestic vs. international crises 5.2 Pure banking vs. other financial crises 5.3 Linkages between the monetary system, capital markets, the banking system and the real economy: the channels of contagion 5.4 A typology of crises • Crises arising from the insolvency of small banks and spilling-over to other banks • Crises arising from extended banking panics • Crises arising from stock-exchange disruptions • Crises arising from foreign-exchange misalignments

5. B. The policy considerations of the reform strategy and the means to achieve them 1. Policy considerations: Helping markets allocate resources effectively reduce frequency and magnitude of crises 2. Available means Promotion of transparency in economic policymaking and provision of accurate economic data Strengthening of financial systems via enhanced supervision and regulations as well as via better market discipline Developed financial systems Less developed financial systems Offshore financial centers Prevention of financial crises (prevent liquidity problems turning into solvency crises) Stronger private-sector involvement Promotion of an ordered liberalization of capital markets I. THE RATIONALE (continued)

6. II. THE MAIN ELEMENTS OF THE NEW INTERNATIONAL FINANCIAL ARCHITECTURE 1. The (monetary) system is based on flexible exchange rates – hence capital mobility remains predominant 2. The role of international financial institutions and fora is to deal with market failures (i.e., information asymmetries and negative externa-lities) and not to replace private capital flows and market forces 3. There is still a notable lack of a coherent set of arrangements – the current international financial architecture consists of a variety of: • intergovernmental fora (G-7, G-10, G-20), • international financial institutions charged with the surveillance of different aspects of domestic and international financial systems (IMF, World Bank, OECD), • sector-specific international groupings of regulators and supervisors (BCBS, IOSCO, IAIS), • committees of central bank experts concerned with market infra-structure and functioning (CPSS, CGFS), and • a cross-sectoral international grouping in which national autho-rities, international financial institutions, the above-mentioned sector-specific international groupings of regulators and supervisors as well as the committees of central bank experts are represented (FSF).

7. II. THE MAIN ELEMENTS (continued) 4. The mandate of international organizations and fora is to promote international cooperation among competent national authori-ties and enhance the exchange of information between them 5. International organizations and fora do have regulatory powers to create soft law (setting of minimum standards and identification of best practices) – the implementation of rules, however, is being conducted on a best effort basis by the competent national authorities. 6. The importance of this soft law has increased with the strengthening of the surveillance functions of the IMF and the World Bank. 7. With few exceptions (WTO, IMF), the international organizations and fora involved are lacking any supervisory powers – the relevant national authorities remain the only supervisory agencies competent within their jurisdictions. 8. A prominent role is given to market discipline.

8. III. THE BUILDING-BLOCKS OF THE NEW ARCHITECTURE • A. The crisis-prevention initiatives of the IMF and the World Bank 1. Assessing external vulnerability of financial systems to crises 2. Transparency in economic policymaking 3. Provision of timely and accurate information regarding economic data 4. Standards and codes of good practice 5. Strengthening financial sectors • Financial sector surveillance • Provision of technical assistance on financial issues • Implementation of FSAP (Financial System Stability Assessments

9. III. THE BUILDING BLOCKS (continued) B. The work of other international institutions and fora 1. Monetary cooperation (BIS) 2. Liberalisation of financial services (WTO) 3. Financial system stability (Financial Stability Forum) 4. Fight against money laundering and terrorism (Financial Action Task Force – FATF) 5. Supervision of financial conglomerates (Joint Forum) 6. Supervision of international banks (Basle Committee on Banking Supervision) 7. Supervision of capital markets and securities firms (International Organisation of Securities Commissions – IOSCO) 8. Supervision of insurance intermediaries (International Association of Insurance Supervisors – IAIS)

10. III. THE BUILDING BLOCKS (continued) B. The work of other international institutions and fora (continued) 9. Integrity of payment and settlement systems (Committee on Payment and Settlement Systems) 10. Operation of market infrastructure (Committee on the Global Financial System) 11. Deposit insurance (International Association of Deposit Insurers) 12. Corporate governance (OECD) 13. Accounting standards (International Accounting Standard Board) 14. Auditing standards(International Forum of Accountants)