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Toward stronger banking systems

Financial Post, Weekly edition, Friday, April 17, 1998

Finance Minister Paul Martin's proposal for a global bank watchdog did not exactly set hearts aflutter at the meeting this week of finance ministers from Group of Seven countries. Although the suggestion was not rejected outright, support for it in the group's final communique was a bit less than lukewarm.

Nevertheless, we believe Martin's idea is worthy of further investigation. Its commendable objective is to limit the risk of another Asia-style financial meltdown.

Martin pointed out to his G7 colleagues that "inadequate financial-sector regulation and supervision is a common element that ties together the otherwise quite disparate experiences of Korea, Thailand and Indonesia." External financial crises, he says, often originate in the domestic banking sector. "If we are to lessen the risk of future crises, we need to focus on building stronger financial sectors."

He proposes a new secretariat, affiliated with the World Bank or the International Monetary Fund, to enhance the effectiveness of financial-sector surveillance. Initially, this body would conduct peer reviews of financial supervisory systems to detect problems before they explode. The banking sector would be first on the table and the results of reviews would be published. This would give investors another source of information on which to base investment decisions; interest rates would likely reflect survey results. Also, peer pressure would probably lead to better regulatory systems in countries receiving poor reviews.

Building strong banking systems is quite rightly the responsibility of individual governments. But given the rapid global integration of financial services, it is worthwhile considering how the international community might assist in that task.

Source: This information is provided by the Financial Post.

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