First, they lent too much to ambitious real estate projects, such as commercial office towers, contributing to a glut that undercut expected profits. Second, the banks lent too much to companies owned by government officials and their friends, willingly disregarding serious problems in many such companies. Third, they made too many short-term loans in foreign currencies (usually U.S. dollars), making borrowers extremely vulnerable to any devaluation in the local currency (which is exchanged for dollars in order to repay the loans).

Combined, these three excesses have always created conditions that "can kill banks very quickly" in an economic downturn, according to Dornbusch, who spoke to IDB officials at the Bank's Washington, D.C., headquarters last January. Dornbusch said such mistakes are hardly unique to Asia or to the developing world in general. In fact, almost identical errors were behind several major financial crises in the United States in Europe over the last 20 years.

Why didn't investors and corporations correct the problems in time to avert the crisis? According to Dornbusch, the fault lies partly with Western banks and investors who took far too many risks in Asia. Faced with such eager lenders, many Asian companies reasoned "They are giving us the money, so we must be O.K.," Dornbusch said. Thus, western banks actually contributed to the false sense of confidence that allowed debt to reach dangerous levels. But even greater blame rests with government regulators who oversee banks in Asia, since they knew exactly how vulnerable domestic financial systems had become but failed to impose tighter restrictions on lending.

In this regard, Dornbusch believes the Asian crisis has clear lessons for Latin America. Although he said banks in the region's largest countries are generally in better shape than their Asian counterparts were last October, he warned that the region's bank regulators are being far too lax. "You would think that much more care would be taken in Latin America (after the Mexican peso crisis of 1995]," he said.

He urged the region's bank regulators to conduct tough hypothetical "stress tests" of local financial systems in order to identify weaknesses and impose appropriate safeguards.