Now, five years into the global financial crisis, Asia is faced with an even more challenging and uncertain global environment, as significant spillovers originating from Europe and the United States are being felt by the region. Again, questions on the sustainability of the region’s economic growth prospects are being raised. My remarks today will focus on the new challenges that are confronting Asia, and whether its resilience built in this decade will now enable Asia to rise to these greater and more complex challenges. Challenges arising from global spillovers Given the degree of openness of most of the Asian economies, Asia is highly integrated with the global economy. While Asia benefited from this openness, it also resulted in the region being more vulnerable to global financial and economic developments. Many previous episodes of economic recession and crisis were triggered by external shocks, which at times exacerbated and amplified domestic vulnerabilities. These include the commodity price shocks in the 1970s and ‘80s, the large swings of destabilising capital flows in the 1990s, the bursting of the tech bubbles and the SARs epidemic in the early 2000s, and finally the global recession which saw an unprecedented decline in global trade. The ongoing global financial and economic crisis is resulting in turbulence in the international financial markets. In part, this is emanating from the global policy spillovers arising from the unprecedented monetary easing, which has resulted in surges of capital inflows in search of higher returns in a low interest rate environment.
While affected by the crisis, the effects on the domestic economies and financial systems have been relatively contained. Importantly, financial  2  BIS central bankers’ speeches  intermediation has not been disrupted, and the financial systems have continued the supply of credit to support the real economy. Following the Asian financial crisis, wide-ranging financial reforms were undertaken to strengthen the financial systems of the region. The building of sufficient capital and liquidity buffers during good times provided the ability to support the continued credit intermediation process. Improved regulatory and supervisory approaches, underpinned by enhanced governance and risk management practices, have enhanced financial stability in the region. Enhanced surveillance arrangements and a wider range of policy tools have placed policymakers in better state of readiness to deal with problems in the financial system pre-emptively. Macroprudential policies have also been extensively relied upon to mitigate the risks from excesses and imbalances in the financial system. Continued efforts were also made to further advance financial sector development in the region. In particular, the development of the domestic bond market has served to reinforce the foundations for financial stability in Asia. Financial activities have also remained generally anchored by productive real economic activities. In addition to the region’s strong external position, high international reserves and more flexible exchange rates have also enabled Asia to absorb and adjust to changing external conditions. The increasing cohesiveness of Asia is also a core strength and source of stability for the region.