Abstract

The years from 1992 to mid-1995 were marked by a series of crises in international financial markets; in contrast, the 12 months to June 1996 have been a period of relative calm. Indeed, the global financial system appears to have emerged stronger and more resilient from the costly and disruptive crises of the earlier years. Financial institutions in most of the major industrial countries have made important progress in implementing reforms to improve their ability to manage and control financial risk in the evolving international financial system. Furthermore, significant progress continues to be made in the major industrial countries in restructuring their financial regulatory and surveillance activities in line with developments in international markets, and in strengthening market infrastructures, in particular wholesale payment systems. Although much remains to be done, many emerging market countries have also initiated reforms to strengthen their domestic financial sectors to better withstand the rigors and vicissitudes of an open international financial environment. The fruits of these efforts are now clearly visible in recent market developments. Although the scale of financial activity is continuing to grow, market participants, including such risk-tolerant investors as the macro-hedge funds, are more disciplined, cautious, and less likely to ignore market fundamentals in their market activities, and markets appear better able to shrug off periods of turbulence, at least for now. Cases in point are the ease with which global markets recovered from the uncertainty in the U.S. bond market in early 1996 and the relatively rapid recoveries of some emerging market countries that experienced contagion effects during the Mexican financial crisis in late 1994.

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