CURRENCY CRISES: LESSONS FROM THE ASIAN AND LATIN AMERICAN CRISES OF THE 1990’S BY DR. MEROUANE LAKEHAL-AYAT ST. JOHN FISHER COLLEGE BITTNER SCHOOL OF BUSINESS ACCOUNTING AND FINANCE DEPARTMENT ROCHESTER, NY IEMS 2001 CONFERENCE

INTRODUCTION ANALYTICAL FRAMEWORK LESSONS LEARNED CONCLUDING REMARKS

INTRODUCTION Global interdependence of the global financial system. Frequency and severity of these crises has increased the need for a quick and effective response. Use Latin American and East Asia to address the key issues.

ANALYTICAL FRAMEWORK OVERVALUED CURRENCY CAPITAL FLOWS, OVERBORROWING AND ILLIQUIDITY TROUBLED BANKS

ANALYTICAL FRAMEWORK Issue with exchange rate system Tendency of pegged currencies to become overvalued Watch for reserves decline and capacity to borrow Solution lies in the adoption of flexible exchange rates OVERVALUED CURRENCY

ANALYTICAL FRAMEWORK Level of foreign borrowing precedes crisis Exchange rates are driven by capital transactions Regulate capital flows CAPITAL FLOWS, OVERBORROWING AND ILLIQUIDITY

ANALYTICAL FRAMEWORK Blame crises on weak institutions Strong banking sector fundamentals Repair banks and set-up strong regulatory system TROUBLED BANKS

LESSONS LEARNED Fiscal Lessons Financial Lessons External Lessons LATIN AMERICA

LESSONS LEARNED Strengthen the tax system Privatize public enterprises Reform social security Eliminate central bank financing Strengthen rules and procedures for budget approval and execution LATIN AMERICA-Fiscal Lessons

LESSONS LEARNED Impose adequate capital standards Check compliance with capital adequacy requirement Impose sound liquidity Facilitate foreign banks participation LATIN AMERICA-Financial Lessons

LESSONS LEARNED Move from fixed to flexible exchange rates systems Positive impact on reserves and liquidity LATIN AMERICA-External Lessons

LESSONS LEARNED Problems Policy Prescriptions Lessons Learned EAST ASIA

LESSONS LEARNED Government involvement in lending Poor supervision Lack of regulations Inadequate legal infrastructure Absence of “a credit culture” Underdeveloped bond market EAST ASIA - Problems

LESSONS LEARNED Blank guarantees of bank deposits Closure of insolvent institutions Bank restructuring and recapitalization Supervision and regulation EAST ASIA - Policy Prescriptions

LESSONS LEARNED Bank closures effect Balance Sheet clean-up Level of external financing EAST ASIA - Lessons Learned

CONCLUDING REMARKS Same symptoms but differences from case to case Debate should not be limited to national policies Focus on the volatility in financial markets Need for coordination and market discipline