The Feldstein/Horioka coefficient skirted one for large parts of this period. The global financial system operated as anything but a system. Indeed, it was this which prompted Feldstein and Horioka in the early 1980s to present the “puzzle” of still-low levels of capital market integration. Yet at pretty much precisely the point this puzzle was being identified, it began to disappear. Correlations quickly moved from close to unity in the early 1980s to close to zero by the start of the 21st century. This was an astonishingly rapid evolution from a world close to financial autarky to one close to financial nirvana. In the light of the crisis, measured levels of global capital market integration have fallen somewhat. But they remain at higher levels than at any point in history. Overall, then, the picture is clear. For much of the 20th century, global finance was more patchwork than network. But the past thirty years have seen that picture change spectacularly. Today, global finance is a well-connected network, a tightly-woven and tangled web, a genuine system. The double-edged nature of financial integration So what are the implications of this increase in global financial integration? There have been large numbers of studies exploring the growth and welfare implications of these trends, using cross-country and time-series evidence (Rey (2013)). This evidence paints, at best, a mixed picture. While capital integration ought to enhance international risk-sharing, there is surprisingly little evidence of this having conferred macro-economic benefits – and some of it having imposed costs.
We must create a banking community that does not tolerate imprudent business practices and lax systems and control. These are the sins of the past. Thailand, for instance, is carefully fostering a new business culture with the right values. On our part, the Bank of Thailand has since March 2002 announced guidelines supporting the practice of good corporate governance of banks' Board and management to ensure that they look after the interests of their stakeholders in an effective manner. These rules are not ground-breaking; they are just simple common sense. But we need to communicate clearly to the private sector what our expectations are and what the consequences are if the efforts fail. Ladies and Gentlemen, The cost of financial restructuring in Thailand was, after all, too enormous in figures and too painful in real terms to allow us to continue with our old way. In addition to changing the corporate culture, we are also amending a few key laws to solidify the foundation of our financial infrastructure. The new Financial Institutions Businesses Act will empower banking authorities with the necessary power to supervise financial institutions on a consolidated basis and to take appropriate actions against weak banks, with the provisions of prompt corrective actions. The Deposit Insurance Act will support a deposit insurance system to limit the loss of public money and reduce the moral hazard inherent in the current guarantee system.