Group of Ten - Financial stability in emerging market economies

April 1997

Financial stability in emerging markets economies
A strategy for the formulation, adoption and implementation of sound principles and practices to strengthen financial systems

In response to an initiative at the Lyon summit in June, 1996, representatives of the countries in the Group of Ten and of emerging market economies have jointly sought to develop a strategy for fostering financial stability in countries experiencing rapid economic growth and undergoing substantial changes in their financial systems. This enterprise has been prompted by the recognition that banking and financial crises can have serious repercussions for these economies in terms of heightened macroeconomic instability, reduced economic growth and a less efficient allocation of savings and investment.

Representatives of Argentina, France, Germany, Hong Kong, Indonesia, Japan, Korea, Mexico, the Netherlands, Poland, Singapore, Sweden, Thailand, the United Kingdom and the United States participated in the work, which was carried out under the chairmanship of Mario Draghi, Chairman of the Deputies of the Group of Ten. In the course of the work, representatives of these economies consulted with officials from other countries in order to take account of their views on the matters being considered. Representatives of the Basle Committee on Banking Supervision, the International Accounting Standards Committee (IASC) and the International Organisation of Securities Commissions (IOSCO) and staff members of the Bank for International Settlements (BIS), the European Commission, International Monetary Fund (IMF), Organisation for Economic Cooperation and Development (OECD) and the International Bank for Reconstruction and Development (World Bank) attended the meetings and provided crucial input. The working party also consulted with other international groupings, received contributions from a number of regional development banks and had the benefit of market participants' views.

The aim of the work is to develop a concerted international strategy to promote the establishment, adoption and implementation of sound principles and practices needed for financial stability. The strategy has the following major components:

• Development of an international consensus on the key elements of a sound financial and regulatory system by representatives of the G-10 and emerging market economies;
• Formulation of norms, principles and practices by international groupings of national authorities with relevant expertise and experience such as the Basle Committee, the International Association of Insurance Supervisors (IAIS) and IOSCO;
• Use of market discipline and market access channels to provide incentives for the adoption of sound supervisory systems, better corporate governance and other key elements of a robust financial system;
• Promotion by multilateral institutions such as the IMF, the World Bank and the regional development banks of the adoption and implementation of sound principles and practices.

In developing this strategy the working party has been guided by three fundamental premises:

• Ultimate responsibility for policies undertaken to strengthen financial systems must lie with the national authorities who have a strong interest in developing sound arrangements for their financial systems;
• In an increasingly integrated global economy, financial sector stability is most likely to be achieved when international prudential standards are met and when markets operate competitively, professionally and transparently, according to sound principles and practices that generate the relevant information and appropriate incentives.
• Sound macroeconomic and structural policies are essential for financial system stability to prevent or at least limit the emergence of serious financial imbalances, misleading price signals and distortions in incentives.

Financial stability requires sufficient political and social consensus supporting the measures needed to establish and maintain that stability. A financial system that is robust is less susceptible to the risk that a financial crisis will erupt in the wake of real economic disturbances and more resilient in the face of crises that do occur. Although reforms are in many cases urgent, the time required for their implementation will differ considerably depending on the nature of the reform and the need for appropriate sequencing. The international community can be of assistance by developing in a consultative manner a corpus of sound principles and practices bearing on financial system robustness and supporting their adoption and implementation.