In spite of the brisk primary and secondary market activities in a few stock exchanges in the region, capital markets, in particular the bond market, remain rather underdeveloped. There is much more to be done, therefore, to further develop the financial markets by the regional jurisdictions. The second part of the conference title - 'The New Frontier' - also contains an important message. Globalisation and the revolution in information technology have fundamentally altered the dynamics of international finance. Such changing dynamics raise concerns among many of us about the manner in which a sizable portion of gross savings in Asia finds its ways into financial obligations of the developed markets before they are recycled back to Asia. As the capital inflows into the region tend to be more volatile, the recycling process may have implications on monetary and financial stability in the region. Another aspect of the dynamics of international finance is contagion. World interest rates have until recently stayed at record lows. In search of higher yields, hedge funds and other institutional investors have scoured the world for assets generating higher returns, driving up asset prices and driving down credit spreads. As the interest rate outlook has become uncertain, fund managers may be reassessing the risks of emerging market assets, as reflected in the recent correction in world equity and commodity prices. A sudden exit of capital could leave those economies with weaker financial systems even weaker, with spillover effects on other parts of the region.
For this reason, one of the most important lessons we can take from the crisis is the importance of building a genuine banking union. The crisis narrative Indeed, the importance of banking union is related with the role of the banking sector in the development of the European economic crisis. As you know, there are many explanations for the crisis: some observers like to focus on unsound fiscal policies and excessive sovereign debt; others on competitiveness losses engineered by uncontrolled unit labour costs; and others still see the crisis more as a traditional balance of payments crisis in a “fully fixed” exchange rate regime. But there is one narrative that connects these explanations and it is oldest narrative of the crisis. It states there was essentially nothing wrong with the initial design of EMU, and the crisis resulted mostly from the fact that several peripheral countries did not respect that design – in particular the fiscal rules of the Stability and Growth Pact (SGP). In this story, the root of the crisis lays mostly with fiscal indiscipline in an over-heating economy. This led to wage and price increases, which implied a loss of competitiveness, which in turn led to the balance of payment crises. This narrative is internally coherent, but in my view it exaggerates the role of fiscal policies as an initial cause of the crisis. To begin with, it does not seem that fiscal soundness, as measured by compliance with the SGP, is particularly correlated with later developments in the crisis.