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For release on d e liv e r y Expected at 11:00 A.M., EST A p ril 7, 1983_____________ Statement by Henry C. W allich Member, Board o f Governors o f the Federal Reserve System before the Subcommittee on In te rn a tio n a l Trade, Investment and Monetary P o lic y Committee on Banking, Finance, and Urban A ffa ir s House o f Representatives April 7, 1983 I am pleased to appear today before th is subcommittee to discuss the proposed expansion o f resources fo r the Internation al Monetary Fund. I w ill also review the IMF's ro le in helping to re so lve serious in tern a tion a l fin a n c ia l problems such as those that have re c e n tly arisen fo r many countries and some of the re g u la to ry proposals re la tin g to U.S. banks' p a rtic ip a tio n in intern a tion a l lending a c t iv it ie s in the fu tu re . The Federal Reserve Board s tro n g ly supports United States p a r t ic i pation in the proposed expansion of IMF resources that is before th is subcommittee. That expansion would in vo lve a global increase in the IMF's basic resources in the form o f quota subscriptions from about $65 b illio n to about $97 b ill i o n , w ith the United States p ro vid in g about $5.7 b illio n of that increase. In a d d ition , the United States and ten other in d u s tria l countries have agreed, subject to le g is la t iv e action, to expand from about $7 b illio n to more than $18 b illio n th e ir c re d it lin e s to the IMF under the General Arrangements to Borrow; the increase in the United States commitment is about $2.6 b illio n . Th is le g is la tio n is the re s u lt of the Eighth General Review of IMF quotas mandated by the IMF's A rtic le s of Agreement. le g is la tio n was already in the p ip e lin e . In th is sense, th is However, in view of the IMF's d e c lin in g liq u id it y , the increased needs fo r temporary balance-of-payments assistance by a large number of member c ou n tries, and the associated threats to the s t a b ilit y o f the world monetary system, we and other IMF members are seeking to complete th is expansion in IMF resources before the end of 1983. Given the U.S. leadership ro le in the IMF and e s p e c ia lly in negotiating th is package, i t is h ig h ly desirable that Congressional action on th is request be completed prom ptly. - 2 U.S. Interests in the IMF As the subcommittee reviews the proposed le g is la tio n on the IMF, i t is appropriate to consider two central functions that the IMF performs. F ir s t , the IMF lends resources to member countries in weak external fin a n c ia l circumstances in order to a lle v ia te the abruptness and s e v e rity o f the balance-of-payments adjustment process that these countries n ecessa rily must undergo. Second, the IMF through it s su rve illa n c e ro le and through conditions attached to the use o f it s resources helps to lim it and reduce the use by member countries of exchange re s tric tio n s and other p o lic ie s that have d is ru p tive or inequitable effects on fo re ig n su p p lie rs, c re d ito rs , or competing producers, and encourages it s members to adopt internal economic p o lic ie s that help to maintain or restore external balance. In both dimen sion s, the IMF contributes im portantly to the s t a b ilit y of the interna tional fin a n cia l and trading system and, thus, the market fo r U.S. exports. The preservation o f a stable environment fo r interna tional trade has become in c re a sin g ly important to the U.S. economy over the past two / decades. In 1982, exports of goods and services by the United States amounted to $350 b illio n , equivalent to almost one eighth of U.S. gross national pro duct. Exports are more than twice as important to the U.S. economy today as they were 20 years ago. The employment generated by these exports accounts fo r one out of eight jobs in our manufacturing sector. One of eve ry three U.S. farm acres is producing fo r export. While exports have become more important to the U.S. economy, the d estination o f U.S. exports has also been s h iftin g in c re a sin g ly toward markets in the less developed, n on -in d u stria l countries. Over the past 10 years the share o f these countries in our exports has rise n from less than 30 percent to about 37 percent of to ta l U.S. exp o rts. - 3 - These markets are sometimes more uncertain fo r U.S. sup pliers because government re s tr ic t io n s on imports tend to be more perva sive in these countries and because the re s tr ic t io n s are subject to frequent change. Moreover, some of these economies have experienced phases o f excessive growth and resulta nt unsustainable payments d e f ic it s follow ed by severe cutbacks in imports in order to regain external balance. The sharp re ve rsa l in import demands by these countries at times have had unfavorable e ffe c ts fo r the U.S. economy. In the case o f Mexico, fo r example, the period o f buoyant growth in the la te 1970s led to a doubling o f U.S. exports to Mexico from an average rate of $8.5 b illio n in 1978-79 to an average rate o f n e a rly $17 b illio n in 1980-81. When Mexico in 1982 faced severe external liq u id it y problems p r io r to the establishment o f its IMF program, U.S. exports to Mexico f e l l sh a rp ly, to less than $12 b illio n , with exports in the fin a l quarter o f la s t yea r at an annual rate of less than $7 b i ll i o n . By c o n trib u tin g to b e tte r s t a b i li t y in the economies o f these countries in the long run, the IMF Increases the s t a b ilit y o f the trading environment and makes possible a more rapid growth o f U.S. exports to these countries on a sustained basis in the fu tu re . By p ro vid in g temporary balance-of-payments financing to countries in weak fin a n c ia l p o s itio n s , the IMF helps to s t a b iliz e the pattern o f in te r national tra de. The ro le o f the IMF is sometimes in c o rre c tly c r it ic iz e d by observers who argue that the IMF is responsible fo r cutbacks in imports or sharp currency devaluations by countries operating under IMF-approved s ta b iliz a tio n programs. While the adjustment actions undertaken in these circumstances are sometimes severe, w ithout assistance from the IMF the adjustment that would occur, a fte r the country's own resources had run out, n e c e ssa rily would be even more severe. During the period o f IMF assistance, the hardships fo r the borrowing country are in part a lle via te d by the resources - 4 that are disbursed in connection with the IMF program. Such disbursements normally include both the funds directly supplied by the IMF and the funds that other foreign creditors agree to lend or to roll over because of the confidence-building effect of the IMF's "seal of approval." Thus, the IMF's assistance implies that adjustment is less draconian for the borrower than would be the case if the country were completely cut off from foreign financing and less burdensome on the United States in terms of lower exports. Hie financial resources provided by the IMF are temporary and must be completely repaid over a relatively short period. The standard maturity is 3 to 5 years, although for some multi-year arrangements— such as those recently approved for Mexico and Brazil— maturities are extended to 6 to 10 years. The loan repayments generate a revolving fund of resources for the IMF that is replenished during periods of calm in the international economy. Interest rates paid to members on the use of their quota subscriptions are based upon short-term market rates of interest in the United States, France, Germany, Japan and the United Kingdom. When the IMF provides a stand-by credit to a member, it requires the member to forgo any intensification of exchange restrictions. In general, IMF members are prohibited by the IMF's charter from interfering with the free flow of foreign exchange payments for imports of goods and services, from imposing discriminatory taxes/subsidies on inporters/exporters, and from engaging in bilateral payments arrangements that unfairly exclude third-country competi tors. As a condition for its stand-by credits, the IMF normally requires the borrower to avoid any new transgressions of these rules and often, in the case of Extended Fund Facility programs, requires the borrower to reverse its recent or even long-standing actions in these areas. - 5Historically/ the United States has been adversely affected by the application of exchange restrictions on international trade. During the 1930s, U.S. exporters were badly damaged by the spread of bilateral trade and barter agreements among other major countries, while U.S. private holders of foreign bonds and the U.S. government suffered heavy losses because of the suspension or restriction of payments by foreign debtors for many years. Currently, the United States retains a vital concern for the mainte nance of free and non non-discriminatory payments for international transactions. In particular, the United States is the world's largest recipient of the types of payments that are most frequently discriminated against, such as dividends, royalties, and license fees. Worldwide export receipts for services by the United States amounted to about $140 billion in 1982— of which nearly $40 billion is estimated to have originated in Latin America and a further $30 billion in other non-industrialized countries. The unhappy history of the 1930s should also remind us that one of the IMF's central objectives is to avoid competitive exchange depreciations in the world economy. This fact is important to remember at a time when the current high unemployment throughout the world may tempt some countries to seek depreciation of their currencies as a short-run device to stimulate employment— rather than to correct a fundamental imbalance in their external accounts. The United States is vulnerable to the adoption of any such exchange rate practices by other countries because the dollar is so widely used as a reserve or reference currency. Uiis latter role for the dollar tends to create a situation where any exchange rate depreciations by other countries would lead to further appreciation of the dollar. Such an appreciation would be particu larly unwelcome at the present time since the United States has already experi enced a large exchange rate appreciation and loss of export competitiveness - 6 - over the past two yea rs. The d o lla r's appreciation that has already occurred, along w ith the weak growth performance o f the world economy as a whole, has been re stra in in g and w ill continue to re s tra in our own economic recovery. Resolving Recent Payments Crises in the World Economy The International Monetary Fund requires a prompt expansion o f it s resources in order to provide adequate assistance to countries that are c u rre n tly experiencing severe balance-of-payments adjustment problems, but as I noted e a r lie r the broad scope o f the proposals before you was determined by discussions associated with the Eighth General Review of IMF quotas— discussions that had been underway before the intern a iton a l fin a n c ia l stra in s emerged last summer. Thus, the proposals need to be evaluated in a longer-term perspective as w ell as from the perspective o f the IMF's immediate liq u id it y needs. The increases would not re s u lt in an inordinate expansion in the IMF's ro le in financing payments imbalances. Nor is the proposed enlargement o f IMF resources and it s lending a c t iv it ie s designed to provide an opportunity fo r banks to reduce th e ir exposure in major borrowing countries or a p o s s ib ilit y fo r borrowers to fo llo w an easy path toward correction o f th e ir payments imbalances. The IMF's e ffe c tive influence over p o lic ie s that it s members fo llo w in correcting th e ir payments imbalances is p a rt ly a function of it s lending capacity. In some extreme cases, countries may face negotiations with th e ir foreign c re d ito rs over new p riva te c re d its or debt rescheduling that require the borrower to conclude an IMF stand-by arrangement as a precondition. In other cases, the IMF may be able to influence a member's p o lic ie s in the course of its ongoing su rve illa n c e a c t iv it ie s and discussions with members o f t h e ir exchange p o lic ie s and exchange re s tric tio n s . However, i t is clea r from recent events th a t, during the e a rly stage o f a country's balance-of-payments problems, the s ize of a potential IMF stand-by c re d it r e la t iv e to a member's need may affect a country's w illin g n e ss to establish an IMF-approved s ta b iliz a tio n program. - 7 The growth of IMF quotas over the past two decades has lagged well behind the growth of the world economy— which, to some extent, may have reduced the IMF's influence. As an offset the IMF has allowed countries' borrowing limits under conditional arrangements to grow to a larger multiple of their Quotas. Consequently, most countries have been able to borrow, over a three-year period, about the same amount from the IMF in relation to imports as they could borrow in the early 1960s. To permit member countries to borrow larger multiples of their quotas, the IMF in recent years has had to rely increasingly upon special bor rowing arrangements with members to supplement normal quota subscriptions. Recently, such borrowings have included those under the IMF's temporary Supple mentary Financing Facility (SFF) established in 1979 and subsequent ad hoc borrowing arrangements with Saudi Arabia and various industrial countries. The United States participated in the SFF but not in the subsequent ad hoc borrowing arrangements. Hie provision of resources to the IMF through borrowing arrangements has the advantage that the creditor countries have somewhat greater control over the availability of credit to borrowers from the IMF. But these arrangements have the disadvantage that ad hoc multilateral efforts to raise supplementary funds for the IMF take time to establish. course require Congressional approval. For U.S. participation, they of Thus completion of the arrangements can come too late to meet the problem at hand. Hie proposed expansion of the General Arrangements to Borrow (GAB) now before Congress would retain the advantage, but avoid the disadvantage, of past temporary borrowing arrangements, such as the SFF. Hie General Arrangements to Borrow were established in 1962, and the size of those arrangements has not - 8 - s ig n ific a n tly increased fo r more than 20 ye a rs. The proposed expansion in these permanent lin e s of c re d it fo r the IMF would bring them more in lin e with the IMF's longer-run needs. Under a proposed change in the p ro visio n s o f the arrangements, GAB resources could also be used by the IMF in the fu tu re to provide loans to non-participants instead o f ju s t to other p a rtic ip a n ts as is now the case. However, the GAB resources would be a va ila b le to the IMF to lend to non-participants in the GAB o n ly in circumstances that threaten the s t a b ilit y of the interna tional monetary system and where the IMF's other resources were not s u ffic ie n t to meet the th re a t. Thus, the enlarged and expanded GAB provides a mechanism whereby the in d u s tria l countries can respond q u ic k ly to the IMF's legitim ate fin a n cia l needs in e xtra o rd in a ry situ a tio n s . The current urgency o f expandinq the IMF's resources stems from a sharp upsurge over recent months in demands fo r IMF finan cing. In the past four months, f iv e developing countries that had encountered payments imbalances or lio u id it y problems— Mexico, B ra z il, Argentina, C h ile and the P h ilip p in e s— have sought and are now obtaining substantial fin a n c ia l assistance from the IMF. In view of these and other e x is tin g and upcoming demands upon the IMF, disburse ments of more than $15 b illio n may be required in 1983, s e rio u s ly depleting the IMF's present liq u id it y . Most o f the IMF's loans go to non-OPEC developing c o u n trie s, which c o lle c t iv e ly had a d e fic it in th e ir balance of payments fo r goods, services and p riva te tra n sfe rs that amounted to more than $70 b illio n in 1982 and more than $85 b illio n in 1981. In view of the abrupt reduction of new lending to many of these countries from intern a tion a l banks since la st September, that d e f ic it w ill have to be reduced s u b s ta n tia lly fu rth e r in 1983. Under the s ta b iliz a tio n pro gram B ra zil re c e n tly introduced, it s current account d e fic it is scheduled to f a ll from $14-1/2 b illio n in 1982 to $7 b illio n in 1983. S im ila rly , in the case - 9 of Mexico the current account deficit is expected to decline from $13 billion in 1981 to about $4 billion in 1983, and in Argentina the deficit is expected to decline from $4-1/2 billion in 1981 to $1 billion in 1983. These represent burdensome, but necessary, balance-of-payments adjustments to restore financial stability for these countries. In addition to an expansion of their exports and continued restraint of their inports, some developing countries will need to implement policies to improve their capital accounts. For example, Mexico and Argentina experienced large outflows of domestic private capital in 1981 and 1982. With a return of confidence in government policy and with appropriate incentives, these funds can be attracted home and can help to finance these countries' needed inports and the rebuilding of their foreign exchange reserves. One objective of the recent IMF-approved programs is to maintain exchange rate and interest rate policies that will facilitate such reflows of capital. While the borrowing countries will have to assure the main burden of resolving their current financial difficulties, foreign banks, the IMF, and foreign governments will also be extending new loans to smooth the immediate adjustment. Hie recent negotiations with Brazilian, Mexican, and Argentine authorities provide a basis for estimating the amounts of new funds that will be available from the IMF and the banks. For Brazil, the IMF has approved credits that amount to $2.2 billion in 1983 and $1.6 billion in 1984. Bank lending to Brazil, net of repayments, is expected to amount to about $4 billion each year. For Mexico, financing from the IMF should amount to $1.3 billion in 1983 and in 1984, while net lending from the banks is expected to be about $5 billion in 1983 and can be estimated at around $3 billion in 1984. For Argentina, IMF credits have been approved to allow disbursements of $1.9 billion in 1983 and a further $300 million in early - 10 1984. New financial commitments of banks to lend to Argentina in 1983 amount to about $2 billion, but will be partly offset by the payment of some arrears on debt service obligations that fell due in 1982. Foreign governmental assistance to major Latin American borrowers will mainly take the form of direct or guaranteed export credits whose magnitude cannot yet be determined. The largest such arrangement undoubtedly will be the guarantees for three-year credits by the U.S. Commodity Credit Corporation to finance shipment of substantially increased amounts of U.S. agricultural exports to Mexico during 1983. to Brazil. Similar assistance will support sales of U.S. wheat Bridging credits that U.S. and other monetary authorities have provided to or supported for the major Latin American borrowers do not show ip in longer-term assessments of the adjustment and financing .prospects for 1983 and 1984. These loans have been useful to meet minimun immediate liquidity requirements while adjustment and borrowing programs were being arranged, but the loans have been or are scheduled to be repaid within a short time. Future Bank Participation in International Lending In formulating their external adjustment programs, major foreign borrowers have realistically accepted that their future access to new bank financing will be less than in the past. Outstanding bank loans to Brazil, Mexico, and Argentina are projected to grow by 5 to 10 percent annually in 1983 and 1984. Under these circumstances, the claims of U.S. banks on these coun tries relative to their capital will decline scmewhat. The prospects for 1983 and 1984 represent a major adjustment from the period 1979-81, when bank exposures in Mexico, Argentina and Brazil were rising at annual rates of 15 to 40 percent. Hiat expansion produced a rapid growth in these claims in relation to bank capital; such a process cannot continue indefinitely. - 11 - The le ve l o f c a p ita l exposure by some banks in some countries has led many observers to conclude that banks have not paid adequate attention to d iv e r s ific a tio n of t h e ir assets. In the current circumstances, however, i t would be unwise fo r re g u la to rs to force abrupt reductions in bank claims on large borrowers. The ris k s of loss on fo re ig n sovereign loans would be increased ra ther than reduced i f banks attempted to p u ll back q u ic k ly from lending, say, to B ra zil and Mexico. In 1974, fo llo w in g the f i r s t sharp increase in o il prices by OPEC, the expansion of intern a tion a l bank lending to developing countries was viewed by many, given the absence of obvious a ltern a t iv e sources o f funds, as a c on stru ctive development that helped to meet the growing financing needs o f these countries. The current in tern a tion a l economic s itu a tio n requires a continuation o f in te rn a tio n a l lending at a r e a lis t ic pace. N evertheless, recent in te rn a tio n a l fin a n c ia l developments have raised l e g i t i mate questions about the fu tu re intern a tion a l a c t iv it ie s of banks, and these questions req u ire prompt consideration. To discourage excessive exposure or lack o f adequate d iv e rs ific a tio n o f some banks, two broad p o s s ib ilit ie s can be considered. . F ir s t , some banks may be encouraged to slow the fu tu re growth in th e ir outstanding loans to some fo re ig n borrowers. Second, banks may be encouraged to expand th e ir capital base. The expansion o f bank capital in re la tio n to to ta l assets has been a prim ary o b je c tive o f U.S. re g u la to ry agencies fo r a number o f ye a rs. Recently, we have witnessed sane improvement in the capital base fo r the large banks, and such banks are e s p e c ia lly active in intern a tion a l lending. Given the buoyancy o f the stock market, conditions are now more favorable fo r fu rth e r actions to improve th e ir capital p o sitio n s. - 12 To ensure moderation in the growth of bank lending to the largest foreign borrowers over the longer term, there recently has been a good deal of discussion of closer supervisory surveillance of banks' international lending activities and possible restraints cm exposures to individual countries. Among the options that have been mentioned in those discussions are: (i) specific country limits, akin to the limits on loans to an individual borrower that are now in effect; (ii) disclosure requirements that would warn stockholders of country concentrations that might affect the safety of their investments in the bank; (iii) establishment of specific reserves for troubled country loans; and (iv) income-accounting requirements that loan fees be amortized over the life of the loan. Country lending limits are likely to be either too rigid or so flexi ble that they are not workable. Limits based cm objective criteria would tend to enforce diversification but would not necessarily steer banks away from the greatest potential dangers. Large countries with stable, diversified economies and politically mature governments tend to attract higher levels of bank expo sure than do large countries that lack those characteristics. Should one place "too low" a limit on the former countries in order to reach an adequately low limit for the latter? If, alternatively, countries are differentiated among risk classes based on subjective evaluations, the limits would have to be changed periodically— requiring controversial judgments by the supervisors, provoking diplomatic pressures or misinterpretations, and possibly inducing abrupt financial dislocations if classifications are changed. Financial disclosure requirements have a number of advantages for the investor, both directly and through providing a solid base of information for evaluation by independent security analysts. On balance, requirements to - 13 provide additional information could contribute to a more effective market policing of and hence prudence in lending practices by banks. Specific reserves have been proposed for the purpose of dealing with severely troubled country credits. They have been proposed to combat the view espoused by some bankers that sovereign credits never turn bad or became unrecoverable because the borrower can never disappear or be liquidated. Some have also argued that regulatory action in such cases might be harmful because it would further damage the debtor's reputation and tempt the debtor not to pay. These arguments appear to me to be unconvincing. It is clearly appropriate for banks to make some provision against loans when there has been a protracted period where the debtor has been unable to service its debt. make such provisions now. Indeed, some banks The question is whether such practice should be more universally adopted. A requirement that fee income, over and above identifiable expenses, be amortized over the life of a loan might reduce somewhat the enthusiasm that some banks have shown toward foreign lending. A fee is normally received by banks at the time a loan is made— amounting to up to one percent or more of the value of some loans. away. In some cases, such fees are not taken into income right However, if they are in whole or in part, they tend to enhance reported bank income at a time when the "strength" of the bank's assets may in fact have deteriorated, e.g., when a rescheduling is involved. One may of course ask whether an accounting requirement to amortize certain loan fees, which under seme proposals would only ccme into play in the case of a rescheduling, would have a significant bearing on banks' lending decisions, but more uniform treatment is probably desirable. When considering the various regulatory approaches, we should guard against over-reaction to problems in foreign lending whose dangers were once downplayed by banks and the markets but which may now have been exaggerated. - 14 - We must in any event re ta in an awareness that a growing economy can c a rry a growing external debt. We must also acknowledge that the current d if f ic u lt ie s in interna tional lending are more a p tly described as liq u id it y problems than solvency problems. F in a lly , where re g u la to ry action is warranted, we should work with a u th o ritie s abroad to seek solu tion s that are consistent and compa t ib le w ith the su p ervisory and re g u la to ry actions that other in d u s tria l countries take w ith respect to the banks under th e ir ju ris d ic tio n ; such a cooperative approach w ill help to avoid com petitive Inequities and a re tre a t to the "lowest common denominator" in the supervision and regula tion o f in te r national lending. As you know, the federal bank regulators have had th is e n tire subject under careful review . Th e ir review is e s s e n tia lly complete and I expect that the Banking Committee w ill re ce ive a more d etailed report on t h e ir conclusions by the end o f the week. International Lending and the A v a ila b ilit y of Domestic C redit In addition to questions raised about the adequacy o f the re g u la to ry and su p e rviso ry approaches to interna tional lending, concern also has been raised that continued lending by banks to developing countries, or lending through the IMF to its members out of the U.S. quota su b sc rip tion , w ill reduce the amount o f c re d it a va ila b le fo r the domestic economy. There are a number o f ways to assess the e ffe c ts on domestic c re d it markets of any increase in in te r national lending. One approach is in the context o f the o ve ra ll balance o f payments; a second is in terms of the s p e c ific amounts involved fo r sp e c ific countries; and a th ird is in terms of the repercussions on domestic c re d it markets o f a breakdown o f p riva te interna tional c re d it flo w s. - 15 - In the context of the overall balance of payments, any increase in foreign lending by private banks or financed through the IMP may have only limited domestic credit implications in the short run. As long as there is no induced change in the demand for U.S. goods and services, the borrowed funds would have to be held, either by the original borrowers or by others, in U.S. credit markets, and there would be no net effect on credit available to the U.S. economy. On the other hand, if there is an increase in the demand for U.S. goods and services as a consequence of the lending, our exports will be larger, and the effect cm U.S. business would be the same as if the credit had gone directly to U.S. exporters to finance their foreign sales. Even if the incremental bank lending in connection with these programs were quite large, it would not in itself create any difficulties for domestic borrowers as a group, though some may gain (exporters) and some may lose. More over, as noted earlier, the additional bank lending contemplated under the various arrangements between banks and major foreign borrowers is a considerable reduction from the rate of lending over the past few years. It should also be viewed in the context of large gross cpaital inflows and outflows from the United States; in fact, much of the international lending by U.S. banks is in effect financed from foreign sources. Finally, the moderate further extensions of credit that are involved in these programs may very well be essential for the maintenance of a healthy flow of bank credit in our domestic credit market. A sudden cut off of lending by U.S. and foreign banks to the countries with severe liquidity problems could force than to suspend all servicing of their debts. Such an event would trigger write-offs of a large amount of banks' assets, weakening their capital base and most likely causing them to raise the cost and slow down the expansion of domes tic credit that would otherwise prevail. - 16 - A more general point may be added. There are ve ry s ig n ific a n t feed backs from the economies o f other countries to the pace of economic a c t iv it y in the United States. Should a sudden contraction o f foreign lending occur, the economies o f some o f our Important trading partners would be forced to contract ab rup tly. Th is could mean another year of d e c lin in g U.S. exp orts, a fte r a year in which the weakness of the external sector was a major fa cto r in the slowdown o f the U.S. economy. In that perspective, a r e la t iv e ly small U.S. share in the flow of new financing to some o f these countries may w ell have a widespread p o s itiv e e ffe c t on the U.S. economy. Role o f the IMF My comments above on the ro le of the IMF in helping to re so lve cur rent intern a tion a l debt problems focused on the Fund as a source o f funds and it s function in promoting appropriate adjustment. The Fund also has assumed a greater ro le in recent months in developing a c lo se r working re la tio n sh ip with commercial banks. Th is aspect of the Fund's a c t iv it ie s is s t i l l e vo lvin g , but on balance i t is lik e ly to contribute to b e tte r informed lending and borrowing decisions. In the context o f the IMF's su rve illa n c e function, the Fund is review ing it s procedures in generating and sharing inform ation and analyses on external fin a n c ia l circumstances o f in d ivid u a l member countries w ith the commercial banking community and with national su p ervisory a u th o ritie s . Over the past months, the Fund also has assumed a ro le in coordinating va riou s forms o f p riva te and o ff ic ia l balance-of-payments assistance in the framework o f IMFapproved s ta b iliz a tio n programs. Time w ill t e ll whether th is w ill become standard procedure fo r the Fund or o n ly re fle c t the exceptional circumstances p re va ilin g in interna tional c re d it markets over the past h a lf ye a r. F in a lly , in designing performance c r it e r ia in Fund programs, the IMF 1s in te n s ifyin g its - 17 focus on the growth and structure of members' external debts and the relation ship of such criteria to assessments of mediun-term debt capacity of the borrowing country. These new and expanded activities by the Fund are likely to have favorable effects on the quality of lending and borrowing decisions, and will help create an environment that it is *~o be hoped will avoid a recurrence of debt problems of the severity we have experienced recently. In conclusion, the United States has vital long-run interests in strengthening the International Monetary Fund, and in strengthening the super vision of banks' international lending. The liquidity needs now present in the world financial system, and the consequences of failing to meet those needs, also argue for prompt, favorable consideration by Congress of the legislation to augment the financial resources of the International Monetary Fund.
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