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International Standards and Codes and Financial Stability
Efforts at implementing standards and codes without concomitant adoption of sound macroeconomic and structural policies are unlikely to ensure growth with financial stability. Emerging market economies undertaking financial reforms have to adopt not one or two but a requisite set of standards and codes in order to promote the twin objectives of growth and financial stability. The process of transmission discussed here shows that information and expectations play a major role in market calculus in undertaking investment decisions and resource allocative functions.
The Mexican crisis of end-1994 and the currency and financial crises in some parts of south-east Asia, Brazil and Russia between 1997 and 1999 have heightened unusually high interest in the adoption of international standards and codes by all ‘systemically important’ countries.1 The international community has recognised that the growing internationalisation of financial markets and the application of computer networking systems have unbounded the dimension and intensity of the crises. It is also being increasingly contended that at least the ‘core’ or key international standards and codes should be implemented in order to help contain the financial stresses and reduce financial system vulnerabilities. It is generally accepted that financial stability should be a goal of public policy, since it is regarded as essential for achieving sustained rapid growth.
Against these evolving developments, it is necessary to have an appropriate understanding of the linkage between the implementation of international standards and codes and financial stability. In order to appreciate this linkage, it would be useful to have at the outset a brief idea of what financial stability means and what are the ‘core’ standards. Thereafter, we shall discuss the processes and mechanisms through which the implementation of standards and codes is said to foster financial stability. In the absence of adequate data base and historical experiences, we will not undertake a quantitative exercise to establish the linkage between the two.
Dear Reader,
