Supervisory lessons to be drawn from the Asian crisis

June 1999

The paper draws some lessons from the 1997-1998 Asian financial crisis for G10 creditor banks and their supervisors, particularly in relation to the Basel Capital Accord and the "Core Principles". A number of recommendations are made relating to the quantitative solvency requirements, the qualitative supervisory review process, and some other areas. By way of background to these recommendations, major differences with earlier emerging market crises are identified, and significant differences in exposure between groups of Asian debtor countries and groups of G10 creditor banks are highlighted. Although some commentators have blamed the Basel Capital Accord for the evolution and the nature of the exposure on Asian counterparties, it was difficult to establish conclusive empirical evidence that the solvency rules caused distortions. The working group identified a number of changes in the practice of supervisors, banks and ratings agencies in the area of country risk measurement and management that have already taken place in reaction to the crisis. However, some shortcomings in the performance of the ratings agencies in the Asia crisis are noted, which may be especially relevant if the regulatory use of ratings is to be increased in the future.