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Asian Perspectives on Financial Sector Reforms and Regulation

Asian Perspectives on Financial Sector Reforms and Regulation

Copyright Date: 2011
Pages: 350
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  • Book Info
    Asian Perspectives on Financial Sector Reforms and Regulation
    Book Description:

    Although emerging economies as a group performed well during the global recession, weathering the recession better than advanced economies, there were sharp differences among them and across regions. The emerging economies of Asia had the most favorable outcomes, surviving the ravages of the global financial crisis with relatively modest declines in growth rates in most cases. China and India maintained strong growth during the crisis and played an important role in facilitating global economic recovery.

    In this informative volume, the second in a series on emerging markets, editors Masahiro Kawai and Eswar Prasad and the contributors analyze the major domestic macroeconomic and financial policy issues that could limit the growth potential of Asian emerging markets, such as rising inflation and surging capital inflows, with the accompanying risks of asset and credit market bubbles and of rapid currency appreciation. The book examines strategies to promote financial stability, including reforms for financial market development and macroprudential supervision and regulation.

    eISBN: 978-0-8157-2211-3
    Subjects: Business, Finance, Political Science

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface
    (pp. vii-viii)
  4. Introduction
    (pp. ix-xiv)

    The global financial crisis that ravaged financial systems in the advanced economies and many emerging markets as well has necessitated the reconsideration of even the basic principles of financial regulation. Remarkably, emerging market financial systems in Asia have in general proved to be more robust and less affected by the global turmoil than their advanced economy counterparts. In light of that, it is important to carefully filter out the right lessons from this outcome. Moreover, the imperative of financial development remains as strong as ever in Asian emerging markets, although the focus is more on basic elements, such as strengthening...

  5. Part I. Macroeconomic Frameworks for Financial Stability

    • 1 Monetary Policy Challenges for Emerging Markets in a Globalized Environment
      (pp. 3-29)

      In the period before the financial crisis, the prolonged period of low real interest rates in advanced economies led to financial imbalances in these economies. The outcome was a search for yield that resulted in carry trades and the increased financialization of commodity markets, which led to volatility in capital flows and exchange rates as well as to escalating commodity prices. These developments had a bigger impact on emerging market economies (EMEs) than they did on advanced economies. However, low interest rates and the search for yield, combined with dubious financial innovations, also led to an excessive and substantially misdirected...

    • 2 The Great Liquidity Freeze: What Does It Mean for International Banking?
      (pp. 30-60)

      In mid-September 2008, following the bankruptcy of Lehman, the financial crisis became global. International interbank markets froze (box 2-1 lays out the main events). Interbank lending beyond very short maturities virtually evaporated. Three-month Libor (London interbank offered rate), the key benchmark for a wide range of financial contracts in money markets, rose sharply. Interest rate and forex swap markets became dysfunctional (figure 2-1). The financial markets in the emerging economies, which had risen for several months after the onset of the crisis in August 2007, fell sharply.

      Tensions began to ease only after the announcement, in mid-October, that the U.S....

    • 3 Macroeconomic Policy Response to the International Financial Crisis through an Indian Prism
      (pp. 61-98)

      It is difficult at this point in time, with little benefit of hindsight and still in the midst of crisis, to say whether we are passing through yet another of those financial crises that have punctuated economic history from time to time or whether we are indeed at a historic tipping point, a watershed that will fundamentally transform the global economy, the conduct of macroeconomic policy, financial regulation, and international financial institutions.¹ The magnitude of the macroeconomic policy response is nevertheless already apparent.

      The recent financial crisis has exposed structural imbalances in the global economy; it has underscored the need...

  6. Part II. Macroprudential Regulation

    • 4 Macroprudential Approaches to Banking Regulation: Perspectives of Selected Asian Central Banks
      (pp. 101-137)

      The past two decades have witnessed a high frequency of banking and financial crises. The blame for these crises is often laid upon macroeconomic policies, especially fiscal and exchange rate policies. Many also passionately argue that bank regulators could do more to ward off crises in the banking system. Borio, in particular, underscores the urgency to strengthen two core and integrated components of prudential regulation.¹ The first one is the microprudential element, which concentrates on the stability of the individual bank. The second, the macroprudential component, is concerned with preventing systemic crisis in the banking system.

      In the past, many...

    • 5 The Role of Macroprudential Policy for Financial Stability in Asia’s Emerging Economies
      (pp. 138-163)

      Episodes of financial crises in both advanced and emerging economies over the past decade leave little doubt that the stability of consumer prices does not necessarily ensure financial stability. Although there is no universally accepted definition and operational measure of financial stability, wide swings in asset prices and the boom-bust credit cycles during much of the Great Moderation bear witness that price stability is not a sufficient condition for financial stability anywhere—in either advanced or emerging economies. Asia is no exception. As shown in the appendix, prices of stocks and housing display wide swings, whereas consumer prices have remained...

    • 6 Macroprudential Approach to Regulation: Scope and Issues
      (pp. 164-179)

      Explicit pursuit of macroeconomic and financial stability can be said to be the single most significant takeaway from the recent financial crisis. More than in the specifics, the importance of this mandate lies in decisively effecting a course correction with regard to the approach and philosophy for regulation of the financial system. It is now being acknowledged that a macroprudential perspective is critical in designing and pursuing microprudential regulation of institutions and markets.

      Two distinct but highly interrelated constructs have come to epitomize this postcrisis framework: systemic risk management and macroprudential regulation. Both these concepts are philosophically appealing and conceptually...

    • 7 Macroprudential Lessons from the Financial Crises: A Practitioner’s View
      (pp. 180-194)

      In this chapter, I focus on the issues of financial stability and central bank policies based on two episodes of financial crisis: one dating from twenty years ago in Japan and the other from three years ago in the United States. I first present one stylized account from a macroprudential perspective of the buildup in financial imbalances that led eventually to the financial crisis in the late 1980s in Japan. Then I illustrate the startling similarities between the recent U.S. subprimetriggered experience and that of Japan in the 1980s. Examining these two crises, I draw four implications for macroprudential policy,...

  7. Part III. Financial Development: A Practitioner’s View 180

    • 8 Financial Deepening and Financial Integration in Asia: What Have We Learned?
      (pp. 197-222)

      The 1997 Asian financial crisis revealed the weaknesses of the region’s financial sectors. It had devastating impacts on the banking sector in some countries, most notably Indonesia, Thailand, and Republic of Korea. At the center of the crisis were currencies mismatches and maturity mismatches throughout the region. A currency mismatch occurs when residents of a country have assets in the local currency but liabilities in a foreign currency. Such was the case in many economies in Asia at the onset of the crisis. Banks and corporations with liabilities in dollars were not adequately hedged against a possible change in the...

    • 9 The Development of Local Debt Markets in Asia: An Assessment
      (pp. 223-252)

      Since the regional crisis of 1997–98, Asian emerging markets have focused considerable attention on developing domestic debt markets to reduce foreign exchange mismatches in their financial systems and to decrease the concentration of credit and maturity risks in banks.¹ Besides building large foreign exchange reserve buffers, much of their effort has gone into local currency bonds, since such bonds constitute a significant share of emerging bond markets, especially in Asia (figure 9-1). Liquid and deep domestic debt markets are seen as vehicles for diversifying the funding of governments, households, and corporations; for attracting the financing required for huge infrastructure...

    • 10 Indian Financial Market Development and Regulation: What Worked and Why?
      (pp. 253-283)

      In this chapter I look at the regulation and development of financial markets in India over the last two decades and attempt to identify the strategies and approaches that have worked, contrasting them to those strategies and approaches that have not worked. I hope that the lessons from the Indian experience will be of relevance to other emerging markets, particularly in Asia.

      The success stories in Indian financial market development are characterized by regulatory reform, which unleashed competition and actively pushed rapid adoption of new technology. This description shares some similarities with Edward Kane’s model of how technology, regulation, and...

    • 11 Financial Development in India: Status and Challenges
      (pp. 284-308)

      India—most certainly urban India—has changed beyond recognition in less than two decades. Undeniably much of that change is the result of the economic reforms put in place since 1991, which have fundamentally transformed the economy and, indeed, the very mind-set of India. The change is more visible in some industries than in others. These include aviation, telecommunication, more recently retail, and certainly finance. Hardly a single area of the financial sector has remained the way it used to be. Private banks, mutual funds, and insurance companies are the most visible new developments. And within finance, financial markets have...

  8. Contributors
    (pp. 309-310)
  9. Index
    (pp. 311-321)
  10. Back Matter
    (pp. 322-323)