I Introduction

International Monetary Fund
Published Date:
January 1993
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This year’s capital markets report has been divided into two parts. Part I, Exchange Rate Management and International Capital Flows, examined the implications of the growth and international integration of national capital markets for the management of exchange rates, with particular attention paid to the currency turmoil that enveloped the European Monetary System last year. Part II of the report focuses on several systemic issues in international finance, including recent experience with loan losses—especially in real estate—of banking systems in a number of industrial countries; sources of systemic risk in the rapid growth of off-balance-sheet financial transactions—particularly in the bank-driven, over-the-counter derivative markets; supervisory and regulatory developments; and some capital market issues pertaining to developing countries.

After reviewing some of the structural factors that have increased banks’ tolerance for more risky investments, Section II discusses the nature and extent of recent banking problems in several industrial countries (Finland, Norway, Sweden, Japan, the United States, France, and the United Kingdom), along with the policy responses to those problems. Section III documents the growing involvement of international banks in derivative finance, considers the potential risks associated with the rapid expansion of the over-the-counter derivative markets, and outlines the supervisory and regulatory approaches to the management of such risks. Initiatives to strengthen the capital positions of financial institutions are reviewed in Section IV. In Section V, the Single European Financial Market, which was targeted for completion by January 1, 1993, is discussed. Section VI analyzes recent activity in the European currency unit (ECU) bond and exchange markets, and Section VII reviews developments in the private financing of developing countries and discusses several issues raised by the recent experience, including the broadening of the investor base for developing country securities, the special role played by regional financial centers in East and Southeast Asia, and the systemic implications of the evolving pattern of developing country financing. Annex I briefly surveys developments in capital flows through international banking and securities markets. Finally, Annex II reviews trends in the evolution of capital markets in developing countries and highlights the necessary preconditions for these markets to operate successfully.

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