FROM THE OFFICE OF PUBLIC AFFAIRS

It is a pleasure to speak with you today. I would like to discuss a topic that I know is very important to all of you as the representatives of global financial institutions; and that is, the issues around the global financial system, both in the short term as we address the current crisis in Asia, and over the longer term as we build the architecture to help prevent future financial crisis, and better manage them when they occur.

To begin, it is important to put the efforts to strengthen the global financial system in the context of the development of the international financial markets and the global economy. I witnessed these developments closely when I was in investment banking and I know that all of you all have lived this in your own firms. Here in the United States, over the last 20 years, many businesses have gone from being predominantly domestic to being true global entities, and developing countries have gone from having little impact on our economic well being to absorbing over 40% of our exports. However, just as these developments have brought great opportunities, there have also been new risks, as we saw in Mexico in 1994 and now in Asia. I believe that the economic well-being of all nations in the global economy in the years and decades ahead will be very much affected by our ability to make the most of those opportunities and to effectively manage the risks.

The interdependence of today's global economy has been brought home to all of us by the recent situation in Asia. As you well know, financial instability in Asia has potential impacts for economies around the world by weakening the affected countries' currencies, which affects the competitiveness of companies outside the country, and the countries' ability to buy foreign goods and services. Moreover, if the problem were to spread to developing countries around the globe, the potential impact could be much more severe. By doing everything sensible to help these countries get back on track, we're obviously helping these countries, but at the same time we are very much protecting and promoting our own interests, by reviving these countries as markets for exports, by promoting stronger currencies in these countries, and by enormously reducing the probability of a contagion that could so severely impact all of us.

As we consider how to deal with the crisis, it is important to remember one common element: In each country where crisis has occurred the financial crisis was either triggered by, or exacerbated by, flaws in the financial sectors of the affected nations. Although circumstances obviously vary in individual countries, all had close links between governments, banks and corporations which led to fundamentally unsound investments by corporations financed by unsound lending by banks. Moreover, financial systems had inadequate financial regulation and supervision, financial institutions lacked transparency, which masked the extent of the problem, undercutting the effectiveness of market discipline. In short, the essential underpinnings to a modern financial system were either weak relatively nonexistent. These conditions existed at a time when vast amounts of capital flowed into these countries -- arguably with a serious underweighting of the risks involved -- and the combination of these vast flows of capital and badly flawed financial sectors proved to be combustible.

That is why the focal point of efforts to restore financial stability in these countries, led by the IMF, has been each nation's financial sector, and other structural reforms. These are not austerity programs.

The fundamental objectives of these reforms are to restore financial stability and confidence, attract new flows of capital, restore economic growth and promote stronger and more stable exchange rates. While financial assistance may be critical to provide the necessary breathing room for these nations, the key is for nations to implement internal reforms.

We have a long way to go and a great deal to do before we can feel secure that the period of instability is over and these countries are back on a path of solid growth. However, the countries in the region have great underlying strengths, such as high savings rates, a strong work ethic and a commitment to education, and, combined with the reforms, that should provide the basis for a successful resolution over time. In our view, Thailand and Korea are implementing reform and are on a constructive path, with both Korea's new President Kim and the now several months old new government of Thailand giving all indications of strong commitments to reform. The Indonesian situation has been more complicated, but in all three countries, the answer is the same: sustained adherence to reform programs that will remedy problems and restore confidence. The other key in Asia is Japan, and, as we discussed at the G-7 finance ministers meeting in London, a return of domestic demand led growth and confidence in Japan, through pursuit of appropriate policies, could contribute greatly to the recovery in Japan's Asian neighbors, and Japan's failure to accomplish these objectives is a major impediment to Asia's recovery.

Even if we work to solve or to deal with these immediate problems in Asia, we are very much focused on the question of the longer-term architecture in the global financial system, both to better improve prevention and to better deal with crises when they occur. The global economy and the global financial markets, as you well know, have grown very rapidly in recent years and have become far more sophisticated.

At the same time, however, the institutions that were created 50 years ago at Bretton Woods to deal with the issues of the global economy and the global financial markets, have changed far less. It is our view that the architecture needs to become as modern as the marketplace. At Treasury, we have been working very intensely with the Federal Reserve Board on these enormously complex issues, and we've been working with finance ministries and central banks around the world to start to build international consensus. These are deeply complicated problems, and major steps forward will take time. Having said that, in our view, it is absolutely necessary that those major steps take place.

We will be looking at changes in the architecture within the context of six objectives: promoting more efficient global markets; increasing disclosure and transparency; strengthening financial systems, both globally and in individual economies; improving domestic policy management; rethinking the role of the international community in financial crises; and appropriate burden-sharing by the private sector. Let me say a few words about that last point, which is often approached through the prism of moral hazard.

We believe, that investors and creditors should bear the full consequences of their actions. And as you know, in Asia numerous banks, investment banking firms and others, have taken or will be taking enormous losses as a result of the instability and the problems in that part of the world.

Having said that, as a by-product of the program to restore financial stability, some creditors will may be shielded in some measure from the full consequences of their actions and addressing this issue as fully as practical is a high priority for us as we work to strengthen the future architecture.

Let me now turn to two, what I would call micro domestic issues, that are of interest to your institutions. Our efforts to strengthen financial systems have not centered solely on countries elsewhere. We have been working hard to strengthen our own domestic financial sector as well. As you know, the Treasury has put forward a financial modernization proposal that would remove outmoded barriers to competition in financial services, and permit banks, securities firms and insurance companies to affiliate with one other. I think most would agree that these reforms are long overdue.

Within the context of removing financial barriers, however, we also strongly believe financial institutions should be able to choose the organizational structure that best meets their business needs. This means, for example, that banks should be able to conduct their full range of financial activities through either a subsidiary of the bank or an affiliate of a bank holding company.

While I cannot say for certain what may happen this year on the Hill, I think it is very important that Congress work through the competing interests surrounding this issue and develop sound, forward-looking legislation -- which will benefit consumers, businesses and communities around the country.

We are also keenly focused on the computer problems associated with the year 2000, an issue of enormous importance for financial service firms around the globe. Because of the increased integration of the world's economy, the Bank for International Settlements is concerned that problems in a single location could rapidly affect others if payments fail to move as expected.

In the United States, financial regulators are working closely with the private sector in order to reduce the potential for major systemic failures due to the year 2000 problem. The SEC now requires public companies to disclose material year 2000 computer problems in their public statements. Bank regulators review each bank's year 2000 implementation efforts during routine inspections, and have already taken several enforcement actions against institutions that have failed to take appropriate steps to deal with the problem.

I think there is room for concern, however, based on numerous anecdotal reports about the lack of progress with respect to the year 2000 issue in many other countries, including some advanced industrial nations. In order to urge other countries to address this matter in a systematic fashion, I have raised the issue with my colleagues in the G-7 and elsewhere and the matter will be part of the G-7 Birmingham summit agenda when we meet in May. But governments alone cannot not solve the problem, and I support each of you to urge your home offices to consider whether existing year 2000 implementation efforts need to be augmented in the coming months.

Before I conclude, let me emphasize that the international financial service firms that you represent will have important roles to play in building an international financial system for the 21st century. When you establish a presence in a developing country, you bring in experience, expertise, and new capital, which helps strengthen its financial sector. At the same time, your experience and expertise can be applied to how these nations develop regulatory systems and the other underpinnings of a modern financial sector which I mentioned earlier. It is in your interest to help these nations build stronger financial sectors, much as it is in the interest of the countries themselves and of the overall global economy.

In conclusion, let me go back to something I said earlier. The global economy offers immense opportunities for businesses and workers around the globe, but also contains risks. Working to make the most of those opportunities, while effectively managing the risks, must be a high priority for all of us in the private and public sectors. The task before us is complex and difficult. But by working together on these issues of immense importance to the international financial system, we will promote a healthy global economy in the years and decades ahead to the benefit of all of us. Thank you very much.