ISDA PRESS REPORT - MAY 4, 2001

* Fed's McDonough sees global strains from slowdown - Reuters
* McDonough Advocates Flexible Approach To Prevent, Cope With
Financial Crises - BNA
* Gramm Says Changed Markets Demand Dramatic Review, Reform of
Securities Laws - BNA
* Lack of banking safeguards in HK - Financial Times
* Japan 'risks slide into downward spiral' - Financial Times
* Accounting Shift Lifts Deutsche Profits - American Banker
* Argentina's strife not over yet - Financial Times

Fed's McDonough sees global strains from slowdown.
Reuters English News Service - May 4, 2001

NEW YORK, May 3 (Reuters) - Federal Reserve Bank of New York President
William McDonough said on Thursday the international financial system is
showing some signs of strain from a slowdown in global growth.

McDonough, in remarks prepared for delivery to a banking group in Frankfurt,
Germany, said there is no broad agreement on how to handle international
financial crises.

"During the latter part of the 1990s, the international financial system has
endured perhaps its greatest stress in the post-war period, and currently we
again are seeing signs of strain associated with the global slowdown in
growth," McDonough said in a text of his speech released in advance.

The New York Fed chief did not comment further on the global economy or
discuss the U.S. economy in the speech, which focused on global financial
stability. McDonough is also chairman of the Basel Committee on Banking
Supervision which recently completed a new accord on bank capital standards.

There is a broad consensus on the need to strengthen financial institutions
at the national and international level in order to create more crisis
resistant economies, McDonough said. But there is no comparable degree of
consensus on how to best handle international financial crises once they do
erupt.

"In particular, there is unease that the current approach to crisis
management that has evolved out of the experiences in Mexico and Asia,
notwithstanding its successes in some cases, entails solutions that are
potentially too costly," he said.

Critics feel the solutions entailed repeated reliance on large-scale support
packages, introduced adverse incentives, or moral hazard, and were in
themselves a source of uncertainty and potential instability, McDonough
added.

He advocated a flexible case-by-case approach to crisis management, adding
that regulators should strive for minimalist intervention.

The role of regulators is not to limit banks opportunities for growth and
profit. "At the same time, if we encourage responsible behavior, we must not
create the illusion that we will rescue every institution that does not
succeed," he said.


McDonough Advocates Flexible Approach To Prevent, Cope With Financial Crises

BNA - May 4, 2001
By Jeffrey Goldfarb

A flexible, case-by-case approach, with minimal intervention by regulators,
is the best way to prevent and cope with financial crises, said William
McDonough, the president of the Federal Reserve Bank of New York and
chairman of the Basel Committee on Banking Supervision.

Speaking May 3 in Frankfurt, Germany, McDonough said bank supervisors around
the world should be working to enable banks to better manage their
businesses and their risks. "At the same time, if we are to encourage
responsible behavior, we must not create the illusion that we will rescue
every institution that does not succeed," he said.

McDonough said that disclosure practices by banks, although improved over
the past decade, have not kept up with the many changes in the way they
manage their risk. He recommended that banks rethink what they consider
proprietary information.

"It is critical to approach the question of disclosure as users of financial
statements," he said. "Shareholders, creditors and counterparties cannot
understand the risks of their own exposures to a bank until they first
understand that bank's appetite for risk and its approach to, and
methodologies for, managing risk. What should drive this debate is market
participants' need for information to make sound and secure credit and
investment decisions, rather than the concerns some have about what was once
considered secret."

Amidst his remarks, an advance text of which was released in New York,
McDonough briefly commented on the state of the global economy, saying there
are some unfavorable signals. "During the latter part of the 1990s, the
international financial system has endured perhaps its greatest stress in
the post-war period, and currently we again are seeing signs of strain
associated with the global slowdown in growth," he said.

McDonough explained that the solutions to recent crises in Mexico and Asia,
even though successful, may have led to certain currently held tenets that
are too costly, introduce adverse incentives or moral hazards, and are in
themselves a source of uncertainty and potential instability.

"But the alternatives," he said, "look even more unpalatable in their
implications. Notwithstanding considerable efforts at the public and private
level to search for a better way, no magic bullet formula has been found.
Nor is one likely to be available."

In essence, McDonough said, the quest for some broad, universal solution to
financial crises is a Pollyannalike pursuit. "If history is any guide," he
said, "new developments in markets and practices quickly will render
obsolete those measures that might seem well attuned to today's
circumstances."

For that reason, McDonough encouraged a "supremely tactical" and creative
case-by-case approach to handling crises.

He specifically argued against standstill solutions, which suspend debt
service, usually in conjunction with the imposition of capital controls.
McDonough said that approach, in his opinion, could make investors skittish
and make it harder to generate support for honoring contractual commitments.
Standstills also undermine market discipline of and ownership by the local
authorities, he said.

"To sum up, I believe the one size fits all disposition inherent in the
standstills approach risks making situations much worse than they need to
be," he said. "The only thing that strikes me as predictable under such an
approach would be that market access would be harmed across the board. Just
as bailouts may encourage too much risk taking, efforts to orchestrate
preemptive bail-ins may encourage too little."


Gramm Says Changed Markets Demand Dramatic Review, Reform of Securities Laws

BNA - May 4, 2001
By Rachel Witmer

Senate Banking Committee Chairman Phil Gramm (R-Texas) said May 3 that the
changes in the U.S. securities markets since the 1930s, and especially in
the last 10 years, demand a "dramatic review and reform" of securities
regulation.

Gramm had previously announced his intention to conduct a top-to-bottom
review all of the securities laws with the intention of modernizing them.

Speaking at a meeting of the Security Traders Association, Gramm said that
the review will be open-ended, and that he will not prejudge the conclusions
from the effort. The senator said that the question he asks in looking at
laws and regulations is "Are the benefits of this regulation in the market
as it exists today worth what we're paying for them?"

In addition, he emphasized that there will continue to be "dramatic" change
in the markets and said, "I want the change to be dictated by the markets
and not the government." One change that he suggested might come "in the
long run" is that securities markets, per se, could become a thing of the
past. "I'm not certain that markets are not obsolete," he said.

Later in his remarks, Gramm clarified his statement, saying "I don't know if
markets make sense any more." He made an analogy between markets and
traditional book stores, which have serious competition from online book
stores. "The Internet has revolutionized the book market," Gramm said. He
then asked, "Is a centralized market necessary?"


NYSE's Survival

At another point in his remarks, Gramm suggested that as all-electronic
markets are proliferating and changing competition in the securities
markets, the New York Stock Exchange's "survival is not guaranteed."

In other comments, Gramm emphasized that while he may refer an individual to
the White House for consideration as a potential nominee for the
chairmanship of the Securities and Exchange Commission, "the president is
going to name the chairman and not me." Asked about the length of time it is
taking for the White House to nominate someone for that position, Gramm
said, "I don't see that any great harm is coming from it."

Gramm told reporters after his remarks that he hoped the administration will
nominate someone who was "knowledgeable, open-minded and free market."
Finding all those qualities on one person is "hard," he said.

On the topic of decimals, Gramm said that he did not see the recent
decimalization of the securities markets as a "fundamental reform." As of
April 9, all securities are priced and traded in decimals instead of
fractions. While on the House side there is some interest in exploring the
effects of decimalization, Gramm said "I don't see anything in it now that
would induce me to want to go back and hold hearings about it."


Lack of banking safeguards in HK
Financial Times - May 4, 2001
By Joe Leahy

Hong Kong lacks many of the formal safeguards in place in the UK and
Australia to protect banking consumers, said a study yesterday by the
territory's de facto central bank, Joe Leahy reports from Hong Kong.

Hong Kong has no general competition law, no regulator with an explicit
mandate for protecting banking consumers and no ombudsman scheme to process
complaints, the consultative study by the Hong Kong Monetary Authority
(HKMA) found.

"As the Hong Kong market is becoming more sophisticated and more
competitive, and as consumer issues are coming more to the fore, it is
timely to consider whether the current arrangements in Hong Kong remain
appropriate," it said. .

Despite its pro-business bias, Hong Kong has been forced to re-examine the
issue of depositor protection following moves to deregulate the banking
sector.


Japan 'risks slide into downward spiral'
Financial Times - May 4, 2001
By Gillian Tett

Falling exports to Asia and the US and the fragility of its banking system
mean Japan risks sliding into a downward spiral with severe regional
consequences for trade, the Organisation for Economic Co-operation and
Development warned yesterday in its latest half-yearly report.

The OECD report says Japan may need to bail out the banks, a move the
government has ruled out.

The report comes at a critical time for the new government of Prime Minister
Junichiro Koizumi. The Paris-based think-tank attracts considerable respect
in Japan, and Mr. Koizumi is due to make his inaugural speech to parliament
on Monday, in which he will set out the government's economic policy.

The OECD report asserts that the level of bad loans is probably larger than
the government admits, meaning that some banks may not have sufficient
capital to write off their bad debts. "In some cases, (realistic write-offs)
might even wipe out the capital altogether, requiring banks to reduce the
scale of their operations, raise capital in the market or seek public
financial support," it says.

The condition of the banking system is likely to be a key focus of Mr.
Koizumi's speech. He has pledged to introduce measures to clear out the bad
loans rapidly, under pressure from countries such as the US. The government
insists the banks have sufficient capital to complete this task.

"Public funds should be injected only when the financial system faces a
crisis," Hakuo Yanagisawa, financial reform minister, said recently. Some
Y7,450bn (Dollars 61bn) of public funds were injected into the largest banks
in 1999.

But many analysts and diplomats fear that without government help the banks
will be too weak to write off their bad loans rapidly.

The mountain of bad loans has damaged corporate confidence and left the
financial sector reluctant to lend.

However, forcing banks to cut their loans to unviable borrowers could lead
to more bankruptcies and rising unemployment in the short term, the OECD
admits. "Managing the loan clean-up will be a huge task for the authorities,
in particular as flagging confidence may dictate that it will have to be
carried out in a short period of time," it says.

The timing of the clean-up is unfortunate, since Japan is suffering the
knock-on effects of the slowdown in the rest of the global economy, through
lower exports.

The OECD suggests that if more funds are injected into the banks, that the
bank managers should be sacked and the shareholders should not be rescued.
However, any fresh injections of public funds could trigger strong public
protest. It could also fuel Japan's spiraling debt burden which is projected
to hit 158 per cent of GDP in 2006 - and 138 per cent next year.

The OECD calculates the government will need to tighten fiscal policy by 10
percentage points of GDP by 2010 simply to stabilise the debt.

This is currently equivalent to Y55,000bn, a sum exceeding total central
government tax revenue. On current growth trends, tax revenue would
therefore need to be doubled if the adjustment occurred on the tax side
alone.

The OECD added that monetary policy would need to be highly supportive. It
expects to see 1 per cent growth in calendar 2001 and 1.1 per cent growth
next year, higher than many analysts are projecting.


Accounting Shift Lifts Deutsche Profits
American Banker - May 4, 2001

FRANKFURT- Deutsche Bank AG, Europe's largest bank, said Thursday that
first-quarter earnings rose 7%, fueled by lower taxes and a new accounting
rule for derivatives, even as revenue from investment banking declined.

Net income climbed to $920 million, or $1.68 a share. The results included a
gain of $208 million from the accounting change.

Chief executive Rolf Breuer is trying to reduce Deutsche Bank's reliance on
investment banking and emphasize businesses such as fund management and
consumer banking. Rivals in the securities business, including Goldman Sachs
Group Inc., reported lower profit in the first quarter. Deutsche Bank said
its investment banking revenue declined 1%.

Another rival reported a similar expectation. "I expect to see growth from
asset management and personal banking this year7 said Helmut Hipper, who
helps manage about $53.4 billion at Union Invest GmbH in Frankfurt.
"Investment banking won't be the main driver."

Deutsche Bank shares fell Thursday by 0.75%, after having risen 2.8% in
early trading.
Without the accounting gain, profit was down 17% in the first quarter. Under
a new International Accounting Standards Board rule called IAS 39, changes
in the value of certain derivatives were included in trading income for the
first time.

"If we take away the accounting change, profit was down in the first
quarter," said Manfred Bleijenberg, an analyst at Delta Lloyd Bank in
Amsterdam, who is recommending that clients "accumulate" shares of Deutsche
Bank.

The company said its tax bill in the first three months declined 38%.
Germany cut its corporate tax rate this year to 25% from 40%.

However revenue from the bank's private client and asset management division
declined slightly, to $1.79 billion from $1.87 billion, and revenue from
corporate and investment banking declined to $4.47 billion from $4.52
billion.

In a letter sent to shareholders Thursday, Mr. Breuer said, "We want to
expand our market position in all important areas of business in the current
financial year. He added, "We expect from this an improvement in our profit
situation compared with our competition."


Argentina's strife not over yet
Financial Times - May 4, 2001
By Thomas Catan

For the past six months, Argentina's markets have been dominated by a single
question: can the country restart its economy in time to avoid a default on
its Dollars 128bn in debt?

The answer is not yet clear. In his first six weeks back in charge of the
economy, Domingo Cavallo has done much to improve a bad situation after
nearly three years of recession.

He has transformed a fractious political scene and restored the backing of
the International Monetary Fund.

His task was complicated by the fact that Argentina missed its first quarter
fiscal target.

Mr. Cavallo has taken a range of measures to rein in the burgeoning fiscal
deficit to meet the Dollars 6.5bn target agreed with the IMF for this year.

Most recently, he moved to eliminate virtually all exemptions on value added
tax, cut Dollars 900m in spending and increased a tax on financial
transactions from 0.25 per cent to 0.4 per cent.

But those steps have only increased concern that Argentina will not climb
out of recession, in spite of his prediction this week that the economy will
be growing at a 5 per cent clip in the last quarter of the year.

Mr. Cavallo's strategy is unconventional. To restart growth, he has
eliminated import tariffs on capital goods to encourage investment, as well
as cut VAT on those items from 21 per cent to 10.5 per cent.

He will also unveil a series of "competitiveness plans" for sectors of
industry that have been hurt by the overvaluation of the peso over the past
couple of years.

The aim is to regain competitiveness without breaking the decade-old peg to
the dollar, which would be disastrous in a country where the vast majority
of public and private sector debt is denominated in dollars.

But investors still question whether the strategy can work, and have pushed
interest rates up to astronomical levels.

Because of those rates, Argentina has long been unable to borrow on
international markets.

Last week it was forced for the first time to cancel a bi-weekly auction of
treasury bills.

Investors will be watching closely to see if Argentina can hold its next
scheduled auction on May 8. If it cannot, then the fears that the country
will have to restructure its debt will again grow stronger, stoking
volatility throughout emerging markets.
Following a brief rally at the start of the year, Argentina's stock market
has again languished.

But razor-thin trading volumes make the country's Merval a poor indicator of
market sentiment. Over the past couple of months it has hovered in a range
of 400 to 460. Yesterday by mid-session the Merval slipped 6.59 to 416.74.

It is the country's bonds that investors will be looking at. They account
for nearly a quarter of the benchmark emerging market debt index, and any
restructuring could spell trouble for such markets around the world.




Scott Marra
Administrator for Policy & Media Relations
ISDA
600 Fifth Avenue
Rockefeller Center - 27th floor
New York, NY 10020
Phone: (212) 332-2578
Fax: (212) 332-1212
Email: smarra@isda.org



Scott Marra
Administrator for Policy & Media Relations
ISDA
600 Fifth Avenue
Rockefeller Center - 27th floor
New York, NY 10020
Phone: (212) 332-2578
Fax: (212) 332-1212
Email: smarra@isda.org