Banking Soundness and Monetary Policy


Charles Enoch, and J. Green
Published Date:
September 1997
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Mr. Kovacs suggested that the problems occurring in the wake of the recent changes in the U.S. dollar/yen rate showed that derivatives could create problems even if the fundamentals were good. Mr. Sheng responded that the existence of derivatives merely accentuated trends that would have taken place anyway. Mr. Lindgren added that not only economic fundamentals must be right, but that also financial fundamentals must be right, and that early action to ensure soundness was needed.

Mr. Thahane asked whether less developed countries should say “no” to derivatives, given that the fundamentals were not yet in place, and that the big financial houses in New York could exploit the weaknesses of these countries. Mr. Garber said that it was hard to say “no” to derivatives. If the banks in a country could be trusted—in the sense that there were no incentives to chase after risky profits—then the banks would use derivatives to reduce risk; in that case, saying “no” to derivatives would be a mistake. If, on the other hand, the banks had no capital and were willing to bet against the safety net, they might be able to circumvent controls by using, for example, offshore operations. In sum, the answer to the question was a function of the ability of the regulators to cope with the situation.

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