International Banking &finance - Essay Example

Robust current account surpluses and renewed non-debt-creating capital flows have reduced east Asia's external vulnerabilities considerably, but they also confront authorities with new policy challenges. (Michael Petis 1994). To meet these challenges, exchange rate policies need to find the right balance between additional reserve accumulation through intervention and further gradual currency appreciations. A case can be made for acquiring some additional international reserves in view of still relatively high ratios of short-term external debt obligations to international reserves.

At the same time, the sizable current account surpluses and other indicators of relatively strong external competitiveness, including real effective exchange rate s that are still significantly below pre-crisis levels, suggest that there is still scope for further currency strengthening before possible overvaluation becomes an issue. In this regard, the implications for monetary policy also need to be considered. As interest rates have to be kept at relatively low levels to facilitate corporate and financial restructuring, further exchange rate appreciation could provide the tightening in monetary conditions that is required to keep inflationary pressures in check.

IMF 2002 According to the study done by the Bank of International Settlements (2006) there are five areas to consider in banking deregulation. The first is the trends in bank credit. Bank credit to the private sector has recently risen in a number of emerging market economies, partly because of stronger demand for loans associated with robust growth and low interest rates, and partly because of greater supply of loans associated with improved bank balance sheets. The second area is the pace of structural change.

Banking systems in emerging economies have been transformed by privatisation, consolidation and foreign bank entry. Bank efficiency and performance have improved, apparently in response to a more competitive climate. The third point is the evolution in and management of risks facing banks. Macroeconomic vulnerabilities have declined, reflecting a mix of favourable temporary conditions as well as improved policies (higher foreign reserves, more flexible exchange rates, domestic debt market development and improved fiscal policies).

Banks increasingly relied on systematic risk assessment procedures and quantitative risk management techniques, with lending being influenced less by government direction or special bank relationships with borrowers. However, challenges still arose from lack of data on loan histories for estimating default probabilities, and risks related to liquidity and credit risk transfer. On liquidity risk, there is a need to ensure that banks rely on the interbank markets, rather than the central bank for liquidity.

Regarding credit risk transfer, notwithstanding significant benefits associated with the growing use of credit risk transfer instruments, their rapid spread might in some cases outpace the capacity of financial institutions to assess and price risks. The fourth area is to prevent systemic banking crises. One indicator of stronger banking systems is that the volatility of output and inflation has fallen in emerging market e