The financial crises in several East Asian nations in 1997 and 1998, and the continuing economic problems in Japan, were made much worse by almost total reliance on bank lending to finance the countries' economic growth, Federal Reserve Chairman Alan Greenspan told a joint World Bank-International Monetary Fund seminar yesterday.

Greenspan contrasted the Asian difficulties with those in the United States and Sweden when banking crises hit both in the early 1990s. Because both nations had alternative financing institutions, such as well-developed stock and bond markets, borrowers could still get funds when the banks got into trouble.

"Improving deficiencies in domestic banking systems in emerging markets will help to limit the toll of the next financial disturbance on their real economies," the Fed chairman said. "But if, as I presume, diversity within the financial sector provides insurance against a financial problem turning into economy-wide distress, then steps to foster the development of capital markets in those economies should also have an especial urgency."

But Greenspan also stressed that development of such alternatives won't be easy because they require "building the necessary financial infrastructure--improved accounting standards, bankruptcy procedures, legal frameworks and disclosure" to function well.

He specifically contrasted what happened in Sweden in the early 1990s when a collapse of real estate prices bankrupted essentially all of the country's banks, which had funded a real estate boom with loans.

"A massive government bailout of the banking sector was initiated," he said. "The Swedish corporate sector, however, rebounded relatively quickly. Its diversity in funding sources may have played an important role in this speedy recovery, although the rapidity and vigor with which Swedish authorities addressed the banking sector's problems undoubtedly was a contributing factor.

"The speed with which the Swedish financial system overcame the crisis offers a stark contrast with the long-lasting problems of Japan, whose financial system is the archetype of virtually bank-only financial intermediation," Greenspan said. With the Japanese banks in difficulty, there has been no other ready source of credit and "a protracted credit crunch."

As for East Asia, "there was little reason to question the three decades of phenomenally solid . . . Asian economic growth, largely financed through the banking system, so long as" loan losses were low. "The lack of a spare tire is of no concern if you do not get a flat," Greenspan said.

Unfortunately, he added, "East Asia had no spare tires."