Provide examples and explain reform measures that have been suggested to reduce the possibility and frequency of international financial crises.

Question

What will be an ideal response?

Answer 1

POSSIBLE RESPONSE: 
Developing countries should pursue sound macroeconomic policies to avoid creating conditions in which overborrowing or a loss of confidence in the government's capability could lead to a crisis. 
Countries should improve the data they report publicly to provide sufficient details on total debt, its components, and holdings of international reserves. Such data should be reported promptly. 
Developing countries should avoid short-term borrowing denominated in foreign currency to avoid crises that begin with foreign lenders demanding rapid repayment. 
Better regulation and supervision of banks in developing countries is needed. With weak supervision and implicit guarantees that the government will rescue banks in trouble, banks have an incentive to borrow too much internationally and take unhedged foreign currency liabilities. Regulators should require banks to use better accounting, to disclose more information publicly, and to use risk-management to reduce risk exposures. Banks should have more equity capital and recognize bad loans and make provisions for them. Regulators should identify weak banks and insist on changes in practices and management. 
A more controversial reform is greater use of capital controls to reduce the likelihood of overlending and overborrowing, to discourage short-term borrowing, and to reduce exposure to contagion.