Latin American Capital Markets

218 PIETRO MASCI AND IVAN SOTOMAYORway by the two major existing standard-setting bodies to achieve a common accountinglanguage.Implementation of Accounting Standards for the Public GoodThe financial crises of the 1980s and particularly those of the 1990s have promptedthe financial literature to develop a line of reasoning that characterizes financial stabilityas a global public good because financial instability is a public bad. Financial instabilityspreads across countries and creates devastating economic and political costs, which,in many cases, are borne by the lower segments of the population. 4 The reasoning, developedfrom the point of view of instability as a public bad, goes as follows: marketsare not perfect, and market failure exists due to information asymmetries and leads tofinancial instability, which constitutes a public bad that in turn creates externalities interms of spillovers (for example, contagion) of crises that spread from one country toanother; generating cost and redistribution impacts. These externalities do not have amarket price or a pecuniary equivalent. Under these circumstances, there is underprovisioningof the global good, financial stability, thereby creating externalities and costs.Following this rationale, a series of instruments or mechanisms have been designedto promote financial stability. 5 The promulgation of international standards—defined as minimally accepted practice that countries should meet in various areas,such as fiscal, monetary, banking, and securities supervision; auditing and accounting;bankruptcy; and corporate governance—is crucial for upgrading financial systems andachieving financial stability. Accounting standards constitute a critical device that supposedlywould allow all economic agents to share a high level of information, thus realizingthe economist's dream of perfect competition.Truthful, timely, and transparentreporting and auditing according to commonly agreed standards would certainly favorfinancial stability as well as the correct functioning of markets and would provide largebenefits to the entire society.4 The Bank for International Settlements (BIS 1997) estimated that the cost of banking crises was 2-3 percent of grossdomestic product (GDP) in the case of the savings and loans crises in the United States in 1980s and 55 percent ofGDP in the case of the banking crises in Argentina during 1980-82.5 According to Wyplosz (1999), the primary mechanisms for promoting financial stability are adequate macroeconomicand structural policies, a legal framework that recognizes and protects property rights, efficient and deep financialmarkets, regulation and supervision, and monitoring of capital flows.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub