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                     Office of the Press Secretary
                           (Cologne, Germany)
For Immediate Release                                      June 18, 1999


Strengthening the International Financial Architecture

Last October, in the wake of severe financial crises in Asia and Russia that sent shockwaves around the world, G-7 leaders committed to work to prevent financial crises and better respond to them when they occur. Leaders have now agreed on new steps to strengthen the international financial architecture:

Stronger International Institutions and a Greater Voice for Emerging Markets

The IMF now has more powerful tools to prevent and respond to systemic

     crises - large-scale, fast disbursing financing and the new line of
     credit (CCL) to protect countries with sound policies from
     financial contagion.  These create strong incentives to implement
     good policies.

Finance ministers will establish an ongoing dialogue among systemically

     important countries.  This dialogue will include emerging countries
     to reflect the fact that tremors in their financial markets now
     reverberate in major markets around the world.

Because capital flows are global but financial regulation still rests

     with individual countries, we created the new Financial Stability
     Forum to bring together international regulators and G-7
     authorities and to anticipate steps that will be needed to tackle
     new risks.  We will expand membership in the Forum to include more
     key financial centers.

We agree to strengthen the IMF and the World Bank

Already, countries are asking the IMF how they should strengthen their policies to qualify for the new CCL -- even countries that do not face immediate danger. The incentives are working.

Enhancing transparency

Strong comprehensive standards for disclosure by governments and

financial institutions will help reinforce market discipline.

Never before were details of IMF economic programs and policy-making

     discussions available to the public.  Now, much of this will be
     public, along with much more data on countries.


During the Asian crisis, investors often fled after learning that countries had compromised their reserves through forward sales or by lending them to domestic banks. New disclosure rules will reveal such actions quickly, discouraging such steps in the first place.

Stronger Regulation in Lending Countries

A stronger Basel Capital Accord to make capital charges better reflect

     the real risk of lending, together with more focus on risk
     management, will encourage banks to lend more prudently.

New measures -- including greater transparency and sounder practices by

     lenders -- will address problems raised by hedge funds and other
     highly-leveraged institutions.

Before the crisis, international banks making short-term loans to Indonesian banks had to set aside the same amount of capital as they did for loans to Citibank. Suggested revisions to the Basle Capital Accord would require them to retain from two and a half times to five times as much - discouraging risky debt accumulation.

Equipping Emerging Market Economies to deal Better with Risk

Weak financial sectors and heavy reliance by firms and governments on

     short term borrowing proved a dangerous combination.  Global
     standards and guidelines for stronger policies and stronger
     regulation -- in areas ranging from debt management to corporate
     governance to insolvency regimes -- will encourage better policies.

New policies will promote more sustainable exchange rate regimes.

Capital flows offer tremendous benefits, but they also bring risks.

     The new consensus on liberalizing capital flows emphasizes the
     importance of strengthening financial systems and prudential

Removing incentives to seek short-term capital, encouraging countries to fund themselves at longer terms, and introducing prudential safeguards on bank borrowing will discourage the buildups of short-term debt that proved so critical for countries like Thailand, Indonesia, Korea, and Brazil.

Sharing Responsibility for Crisis Resolution

A new framework sets out the range of approaches the official sector

     will take in facing crises - the principles that will guide
     decisions and the tools that will be used.  This promotes
     appropriate "bailing-in" of private sector lenders and should
     help prevent contagion.

New measures -- including provisions for better debt management -- will

     help insulate countries from market shocks and help prevent shocks
     from becoming full blown crises.

The new framework should reduce the risk that investors will lend in the expectation that the international official community will protect them from adverse outcomes. Investors should make better decisions if they understand the framework for official action.