Even so, targeted fiscal and monetary stimulus measures should support growth at close to 7% this year. •  Against this backdrop, overall growth in Emerging Asia will remain firm, at 6% this year. Banks in Emerging Asia will therefore not do badly. There are, however, downside risks that they need to watch. First, the divergence in monetary policy settings among the G3 economies could pose risks to financial stability that could also potentially hurt growth. The anticipated normalisation of interest rates in the US against continuing quantitative easing in the Eurozone and Japan will be reflected in sharp movements in exchange rates and bond yields. This is not a prediction, it is already happening. The scenario of a “double whammy” posed by a rise in US interest rates and a strong US Dollar could expose vulnerabilities among some Asian borrowers. •  Rising interest rates will increase the debt servicing burden of Asian households and corporates, especially those who have taken on high levels of debt at low rates. •  Asian corporates with large unhedged dollar borrowings could face increasing stress as a strengthening dollar undermines their ability to repay loans. Banks in Emerging Asia could face higher non-performing loans. They could also face reduced US Dollar funding if there are large capital outflows from Asia. But their liquidity and capital positions are generally sound and they should be able to weather this. What matters is the medium to long term, and here the outlook for Asia remains sanguine.
•  Basel III calls for an increase in both the quantity and quality of capital that banks must keep as a buffer against unexpected loss. •  Basel III will also put in place a new global liquidity standard. Banks will be required to hold enough liquid assets to survive a 30-day period of cash outflows. There are also efforts underway in advanced jurisdictions to reform banking structures. The details vary but the overall thrust is to separate retail banking from riskier activities like proprietary trading and investment banking. The objective is to simplify business models and facilitate the resolvability of large and complex banking groups. On the whole, the reforms will help to make banks safer and financial systems stronger. But they are not without some negative consequences, and their distributional impact is uneven. For many global banks, the new regulatory standards and reforms to national banking structures will mean a fundamental review of their organisation and activities. In fact, the international operations of global banks are already being affected. •  According to the IMF, direct cross border lending as a share of total banking assets has declined, mostly due to the retrenchment of Eurozone banks. For many Asian banks, the transition to the new regulatory standards will probably be less demanding. First, many of them had already bitten the bullet after the Asian Financial Crisis and built up their capital and liquidity buffers. They are thus starting from a stronger position to meet the new standards.