There are obviously many, but I will focus on four main categories, namely: global integration of financial markets; financial liberalization and increased competition; maintenance of asset quality; innovation and technological change. Global integration of financial markets 13. The trend of global integration of financial markets is clear. The increase in capital flows into the emerging markets has been one of the dominant features of the 1990s. During the period 1990-95, inflows into the Asian economies amounted to $ 360 billion4. The effect of this has been to bind individual economies even more tightly into the global market place. While this has brought major benefits to the recipient economies in terms of encouraging increased investment and development of capital markets, it has also left them more exposed to external shocks and loss of confidence. The macroeconomic instability caused by large-scale inflows and by their subsequent reversal will clearly have an adverse impact on the banking system. The risk of this is less if inflows take the form of more stable longer-term direct investment. To a significant extent, this has been the case for the Asian economies. But for some economies short-term inflows have been relatively large, and there are doubts about their sustainability. 14. Inflows of hot money also create more direct problems for the banks as well as affecting the macroeconomic environment. In particular, they will tend to add to the liquidity of the banking system and encourage expansion of lending.
Mr. Yam looks at Asian banking in a regional and global context Address by the Chief Executive of the Hong Kong Monetary Authority, Mr. Joseph C.K. Yam, at the ADB-IIF Forum on Developing Asian Financial Markets held in Fukuoka, Japan, on 10/5/97. I am pleased to be here this morning to address you on the subject of Asian banking in a regional and global context. I will be speaking particularly about banks in the East Asia region. The importance of banking stability 2. There is increasing international recognition of the importance of a sound banking system in promoting macroeconomic stability, sustainable economic growth and the efficient intermediation between savings and investment. The last few months have seen a series of initiatives by international financial institutions and groupings to devise principles, standards and strategies for the promotion of financial stability. While these initiatives have been directed principally at emerging markets, they also have application to the more developed markets which have been by no means immune from banking problems in recent years. A number of Asian economies, including Hong Kong, have participated in this work. This is a practical recognition that the setting of international regulatory standards must be a broadly-based process, in keeping with the global nature of today’s financial markets. 3. I do not need to belabour the point about the debilitating and disruptive effects which banking problems can have on economic and monetary management. The need to restore the capital of failed banks can impose a heavy fiscal burden.