Resource information
Economists seeking explanations for the
global financial crisis of 1997-99 are reaching consensus
that a major factor was weak financial institutions, which
resulted in part from inadequate government regulations. At
the same time many developing countries are struggling with
an overregulated financial system-one that stifles
innovation and the flow of credit to new entrepreneurs and
that can stunt the growth of well-established firms. In
particular, too many countries are relying excessively on
capital adequacy standards, which are inefficient and
sometimes counterproductive. The author argues that
financial systems can be reformed successfully using a
'dynamic portfolio approach' aimed at managing the
incentives and constraints that affect not only financial
institutions exposure to risk but also their ability to cope
with it. The article sets out general principles of
financial regulation and shows how the dynamic portfolio
approach can help countries deal with the special problems
that arise during the transition to a more liberalized
economy as well as those that arise in dealing with a
financial crisis similar to the 1997 crisis in East Asia.
