I Introduction

International Monetary Fund
Published Date:
January 1992
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This report presents the International Monetary Fund’s annual survey of developments, prospects, and key policy issues in international capital markets. This year the focus is on how to manage the restructuring of capital markets in an environment of wide-ranging liberalization, intense competition, and growing securitization—in a way that avoids a systemic crisis as well as moral hazard risks and budgetary costs associated with public sector support of weak financial institutions.

Liberalization and technological advances have unleashed powerful competitive forces that are now transforming the financial systems of the major industrial countries. Although this development is further advanced in some countries than in others, none are immune. In many ways this transformation of the financial service industry resembles the restructuring that has already occurred in some other sectors, such as the steel and airline industries. But the financial sector is different from other sectors, in that a failure in the financial system of a major industrial country, if unchecked, could have a rapid and powerful detrimental effect on the world economy. Because of their systemic importance, the formulation and the implementation of sound, internationally consistent financial policies pose no less of a challenge for public policy than do the design and implementation of appropriate macro-economic policies.

The spate of recent problems in financial markets should be a reminder that the supervisory and regulatory framework must remain strong and evolve along with the evolution of markets themselves if their integrity—a sine qua non for their long-term development—is to be preserved. The stakes involved, both for the countries most immediately affected and for the international community as a whole, are considerable. The mounting cost of the U.S. saving and loan restructuring—by now well in excess of $100 billion—is a vivid illustration of how an initial, industry-specific financial problem can take on much larger dimensions. At a time when meeting the growing global demand for saving hinges critically on decreasing the dissaving of the public sector in many industrial countries, problems of the financial industry cannot be viewed as a sideshow to macroeconomic developments; the potential liabilities and risks are too large for that.

Section II of this report presents a discussion and general assessment of the main issues associated with the ongoing structural changes in major financial markets. Section III reviews recent initiatives to strengthen financial stability through improved regulation and supervision. The emphasis is on the newly agreed capital adequacy standards for banks and securities firms, the supervision of banks’ foreign establishments, and securities market regulations aimed at preventing manipulation. Section IV describes and analyzes recent developments in asset prices, interest rates, and banking and securities flows in major financial markets. Finally, Section V reviews developments in the private financing of developing countries and highlights the ongoing restoration of access to international securities markets by several countries with recent debt-servicing difficulties.

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