TEXT: RUBIN SPEECH TO IIF IN HONG KONG
(Opening markets compatible with better surveillance)

Hong Kong -- U.S. Treasury Secretary Robert Rubin says that efforts to strengthen the regulation and surveillance of emerging economies' financial systems are completely compatible with the further opening of these sectors to competition.

"Experience has taught that openness to the outside world -- and all the competition, capital and expertise which that implies -- can enhance a country's capacity to build a strong and stable domestic financial system," Rubin said in a September 22 speech here to a meeting of the Institute of International Finance (IIF), a global association of financial institutions.

He said the United States is seeking a "substantial increase in foreign access to major emerging market financial systems in our current negotiations for a financial services liberalization agreement within the World Trade Organization (WTO)."

In his speech, Rubin reviewed on-going efforts to help emerging market governments build strong national financial systems. He noted the tremendous increase in the amount of capital, in all forms, flowing to the developing world. He praised efforts encouraging the International Monetary Fund (IMF) to make capital market liberalization one of its basic concerns.

Rubin is in Hong Kong for the annual World Bank/IMF meeting.

Following is the text of Secretary Rubin's speech as prepared for delivery:

(Note: In the text, "billion" means thousand million.)

(Begin text)

It is a great pleasure to have the opportunity to talk to you about a subject which lies right at the heart of what these meetings in Hong Kong are about. In recent years we at the U.S. Treasury have been closely involved in stepped-up international efforts to promote a strong and stable global financial market; because we know America's continued economic strength -- and that of every nation -- will depend on the strength of the global economic system as a whole; and we know that the strength of the global economic system, in turn, will depend in large part on the strength of international financial markets.

I will devote the bulk of my remarks today to describing the strategy to strengthen financial markets in emerging economies which we have been developing in collaboration with our partners in the G7 and G10, representatives of emerging market economies and international institutions. It is fair to say that those efforts have made more progress -- in a shorter time period -- than many thought likely a few years back. But recent events in Southeast Asia have been a timely reminder that much more remains to be done.

We need to broaden further the global consensus that has emerged in recent years on the ingredients of sound financial systems. And, most important, we need to see that consensus leads to actions -- not just by domestic and international policy makers but by market participants themselves. Today's conference, hosted by the IIF, an organization that has done much to inform debate on financial market stability, will play an important part in building the momentum to push things forward. But first, let me say a few words about the dramatic changes which have put this issue so high on the global agenda.

1. The Democratization of Global Capital

In the last few years we have seen truly breathtaking changes in the international financial landscape. We all know the tremendous innovations there have been in market technology and the number and type of financial products. But just as striking, perhaps, has been the sheer growth in the number of people and countries that can make use of them.

In 1992, my last year in investment banking before I went into government, 16 developing countries issued sovereign debt on the international markets. Today, 56 countries have done so, with the number growing by the month -- more than 30 countries have tapped the markets for the first time in the past two years alone.

It is not just governments: Across the emerging markets, public enterprises, private companies and even regional and local governments have gained access to global capital. Last year over $250 billion in private capital -- direct investments, portfolio flows, and bank loans -- flowed to the developing world, compared to $25 billion in 1986. It was not very long ago that official flows to these economies exceeded private ones. Now, many of the countries that years ago were in the thick of the debt crisis are finding it possible to extinguish Brady bonds by issuing in their own name, without U.S. Treasury collateral.

II. New Benefits and Challenges

Improved access to finance for so many countries and firms around the world has brought tremendous benefits for the global economy -- in faster growth in the emerging economics, higher returns, improved risk diversification and better management of balance sheets for investors and financial firms.

But if we are learning daily of the advantages of private capital flowing more freely across the globe, we are also becoming keenly aware of the risks. External finance can add to a country's investment resources and promote faster growth. But if there are serious weaknesses in the domestic financial system, there is a danger that the finance will be put to bad use -- causing immense difficulties for policy makers further down the line.

The IMF has calculated that two-thirds of its member countries -- developed and developing -- have had significant banking problems in the last 15 years. The fiscal costs of governments cleaning up these crises have often been severe -- ranging from about 3 percent of GDP in the case of the U.S. savings and loans (S&L) crisis, to well over 20 percent of GDP in Chile in the 1980s. Yet the costs of these crises go well beyond damage to budgets. They can undermine economic stability and growth and, sometimes, even the stability of a whole society.

The very regularity of these experiences -- at least from the South Sea Bubble onwards -- reminds us that building a strong and stable financial sector is difficult. Difficult -- yet absolutely indispensable. Establishing a strong framework of policies and regulatory institutions to underpin the financial sector will be the key to sustaining the growth which so many emerging economies have enjoyed these past years and maintaining stability. But there are no quick fixes: It will require sustained action, across a range of fronts.

As I look at the challenge this presents to emerging markets I am mindful of the fact that the institutions and laws we have in the U.S. to supervise our domestic financial system were developed step by step over a period of a hundred years. And we, too, face a daily challenge ensuring these institutions keep abreast of changes in the market. Our own S&L crisis in the 1980s owed much to a failure to supervise those institutions adequately as they moved into new services, and also to a delay in taking decisive corrective action.

III. The International Strategy for Strengthening Emerging Market Financial Systems

To respond to this new world the international community has undertaken a number of initiatives to strengthen the global framework for dealing with financial sector risks and make it as modern as the market. As you know, an important part of this strategy is aimed at the international financial system as a whole. In this context we have worked to improve IMF surveillance and increase cooperation among the various international regulatory bodies and international financial institutions -- to provide early warning and prevention of financial crises, and to improve the international arrangements for dealing with them when they take place.

The second set of initiatives, which is the focus of these meetings today, has concentrated more on building stability from the ground up -- by which I mean on building strong national financial systems to underpin this new global market. A year ago a Working Party On Financial Stability in Emerging Market Economies was created, made up of representatives of G10 and emerging economies, international supervisory bodies and the international financial institutions. This recommended a concrete strategy, which was presented to finance ministers of all IMF member countries in April and endorsed by G7 heads at the Denver Summit in June.

One of the starting points of the strategy is that many different factors will contribute to the overall strength of a country's financial system. Sound macroeconomic policies are vital, in providing a stable decision-making environment for investors and financial institutions. And yet, as we have seen recently, a relatively long record of good macroeconomic policy-making is not sufficient protection against financial crises when supervision -- and the underlying legal and financial infrastructures -- have not kept pace with the development of the economy. Equally, governments also need the political will to act when needed. Let me describe briefly the three strands of the strategy.

First, to give governments a clear framework for action in this area, the strategy has looked to the international supervisory community to establish a broad consensus on the core ingredients to sound financial systems. As you know, the Basle Committee has developed the "Core Principles for Effective Banking Supervision," and IOSCO is already well on the way to developing an analogous set of principles for the supervision of securities firms. These efforts have received the broad approval of national authorities in gatherings such as this one. But they are only go to work if national authorities individually endorse the Core Principles and put them into practice.

Second, the IMF and the World Bank must be, and are, committed to investing major resources in this very difficult process of doing what they need to do to strengthen their financial sectors. Both organizations can provide valuable support in the form of greater policy dialogue, lending programs and technical assistance.

The third strand looks to the discipline of the markets themselves as our first -- and best -- line of defense in preventing crises and promoting stability. In my view, it will be the markets that will ultimately do most to spur the development of sound financial systems in emerging economies in the years ahead: by, directly or indirectly, encouraging governments to develop strong legal and financial infrastructures and firms to improve their corporate governance and disclosure. Our aim must be to find ways to improve the markets' ability to play that role.

The enhanced IMF surveillance and disclosure requirements put in place after Mexico have made it easier for investors to make informed judgments about the state of a country's financial sector -- and easier for markets to spot difficulties at an earlier stage. We need to go further, however, and we are asking the IMF to explore ways to strengthen its disclosure requirements, both with respect to international reserves and the commercial banking sector. In addition, private rating agencies might perhaps take it unto themselves to assess individual country's progress in implementing the Basle Core Principles and publish their assessment alongside existing indicators of country's credit rating.

As I said at the beginning, we have come farther, faster, in our efforts than many might have thought likely a few years ago, but recent events remind us that very important and difficult work lies ahead. International cooperation and agreements on core principles can help governments build strong and stable financial systems -- but, ultimately, nothing matters unless governments act. The challenge for the months to come will be to make sure that individual governments back up their collective support for the strategy with domestic measures to implement it on the ground.

IV. The Two Sides of Successful Financial Integration

Before I finish my remarks I would like to say that I believe that every one of the important steps I've outlined for strengthening emerging economies' financial systems is compatible with equally determined progress toward opening up the financial sector to the outside world. Experience has taught that openness to the outside world -- and all the competition, capital and expertise which that implies -- can enhance a country's capacity to build a strong and stable domestic financial system. That is why we are pressing for a substantial increase in foreign access to major emerging market financial systems in our current negotiations for a financial services liberalization agreement within the World Trade Organization. And it is why the entire membership of the IMF has just now moved to make capital market liberalization a basic purpose of the IMF and extend its remit to include capital movements.

Let me absolutely clear: Openness does not mean freedom from regulation. An equally strong lesson of history is that financial liberalization must be accompanied by sound macroeconomic policies -- and the development of all the supervisory and other ingredients of a strong financial sector I have been discussing here today. But it would be the gravest mistake to believe that these efforts were at odds with the equally important goal of closer integration.

In the end, the strength of all our financial systems will be judged by whether they let each and every nation take advantage of the opportunities the new global economy provides. Judged by that yardstick, a closed financial market will never measure up. Moves to strengthen financial markets, and to open them, will both be vital to realizing the possibilities of a truly global economy -- and they must both remain at the heart of our international economic agenda as we go forward from Hong Kong. Thank you.

(end text)

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