In its annual report on the past year's events in the global capital markets, the central bankers' central bank gives a sharp caution that the blame for the turmoil cannot be placed on the afflicted Asian countries alone. Banks and investors had lent incautiously in a herd-like fashion, and are still doing so, it says.
The report, published the day the dollar surged to a new seven-year high above 140, also warns of emerging imbalances in the world economy due to the strength of the US currency.
The report's figures show that Asia suffered a massive reversal of capital flows, with a $62bn inflow in the first half of 1997 turning into a $100bn outflow in the second half. But total bank lending and other activity in the international capital markets soared. Gross bank lending totalled $1.3trn, up from $551bn in 1996.
The BIS concludes: "The financial services industry has clearly entered a period of sharply increased competition and some banks may have been tempted to engage in unusually risky business." Banks had "generally ignored" signs of mounting risks in Asia. Although it accepts the need for thorough financial reform and increased transparency in the affected countries, the report questions whether the current patchwork of national regulatory structures is adequate to supervise an industry increasingly consolidated across borders.
The reaction to future crises must include a better response from lenders themselves, with the private sector needing "to take some responsibility for the ongoing provision of credit to customers to whom they had previously lent all too freely."
If it turned out that individual banks had underestimated the risks because they were unaware of the total scale of lending in Asia, "this would in itself provide an argument for some form of public policy intervention," the BIS said. But it pointed out that its own annual report 12 months ago had drawn attention to over-investment in the region.
The one group of investors exonerated of any responsibility for the crisis are hedge-fund managers like George Soros. They had cut back their exposure long before it began, whereas banks continued lending up to the last minute, the report concludes.
In its general assessment of the state of the world economy, the BIS remains optimistic about growth in the US and UK, but cautious about the outlook for the euro-member countries and Japan.
The biggest risk for the US is posed by the overvalued dollar - the report cites studies showing it could be as much as 40-50 per cent overvalued against the yen.
A yawning US trade deficit could trigger either a sharp drop in the currency at some stage, which in turn could trigger inflation, prompt higher interest rates and burst the share price bubble. Alternatively, it could give rise to protectionist measures.
The report said the transition to the euro had gone remarkably smoothly but dangers remained in the pressure that expensive social security systems would place on government finances. "Fiscal balances could deteriorate sharply in coming decades," it warns. Outlook, page 19Reuse content