While Asia was preoccupied with its problems, globalisation of financial markets proceeded apace, spurred on by deregulation and technology. With the internet, markets are becoming borderless. Banks, insurance firms, and now securities exchanges are facing cut-throat competition, and going through a worldwide wave of mergers and consolidation. Singapore has to keep up with these global trends to remain a sound yet dynamic financial centre. For many years, we had regulated our financial sector tightly. We insisted on high standards of integrity and competence. We sought to protect investors, especially retail investors, by circumscribing what they could be allowed to invest in. We protected local banks and stockbrokers from foreign competition, in order to build up dependable Singaporean players. We sought to minimise risk wherever possible, and accepted the trade off for a less vibrant and innovative industry. This approach had worked, and proved its worth in the crisis. But going forward, it no longer suffices. In the new environment, we need to take a bolder, less dirigiste approach. We should regulate with a lighter touch, accept more calculated risks, and give the industry more room to innovate. We need to liberalise and allow greater competition. We will not abandon the high standards of integrity and sound financial management which we have built up. But our attitude to supervising risk must change. 6  Before the crisis, NPLs were 3% of loans. During the crisis, NPLs rose only to about 12%, most of which was on account of lending to the region.
These grew more serious in the 1990s, but they continued to be masked by generally sound macroeconomic conditions and investor confidence in a sustained Asian boom. However, the sudden onset of the crisis cannot be explained without appreciating the panic-prone and panic-inducing behaviour of international financial markets. Fortunately for most of Asia, the crisis, though severe, was short. The Russian default and LTCM debacle in the fall of 1998 were a turning point. The G7 countries, led by the US Federal Reserve, lowered interest rates promptly and decisively. While this lowering was motivated by domestic considerations, there was also a collective sense of concern over the weak state of the global economy. In the event, it helped restore liquidity and confidence to global financial markets. Now nearly all the Asian countries are recovering, though in different ways and to varying degrees. Post-crisis caution After this near-death experience, it is not surprising that countries are re-examining their belief in the global economic system. What lessons have countries learnt? 1  IMF News Brief 97/19, 8 October 1997. BIS Review 76/2000  2  Firstly, unlike previous crises, the crisis was due mainly to a run on the capital accounts. Thus, there was no reason to rethink the merits of free international trade and investments. These fuelled the last Asian boom, and are crucial if countries are to get their economies growing again. The most open of the Asian economies – Hong Kong and Singapore – were among the least badly affected by the crisis.