A crisis of confidence in the international banking system, which is more likely now than in many years, could turn the worldwide recession into a depression according to H. Johannes Witteveen, chairman of the Group of Thirty.
In the annual report of the international bankers group, Witteveen questions whether the reserves that banks have built up in good times are adequate to cover the possible scale of financial shocks. The nonprofit organization is a consultative group on international economic and monetary affairs based in New York.
"Recent developments in the United States, where a trader in government securities and a small bank have failed, demonstrate that seemingly minor events can in present conditions have a large impact on the profitability of even a large bank," writes Witteveen, who also is former managing director of the International Monetary Fund.
"The very advanced degree of integration of banking and money markets is likely to make almost any serious financial problems of the future an international one," he continues.
At the same time, the recession and the growing weakness in the financial condition of many borrowers is likely to produce a steady stream of 'problem' cases among both borrowers and lenders--both countries and banks."
To respond to such problems, adequate funding for the IMF is needed, Witteveen argues. In addition he says "There is also a case . . . for checking the adequacy and clarifying the arrangements that central banks would make to provide 'lender-of-last-resort' facilities to meet liquidity difficulties--to be distinguished as far as possible from solvency problems--of distressed banks at the international level."
Meanwhile, in Washington, Treasury Secretary Donald T. Regan said that he thinks Brazil can weather its debt problems with a dose of austerity and continued assistance from the international banking community.