Building Frameworks for Financial Stability in Asia

Challenge

Financial stability in Asia is a key policy priority. Over the past 20 years, Asia has been the fastest growing region in the world, now making up around 30 percent of the world’s GDP. As the region grows, Asian financial sectors have become bigger, more complex, and closely intertwined. Drawing on the experience of the 1998 Asian Financial Crisis, strong reforms have been implemented to effectively manage this financial sector growth, address risks to financial stability, and avoid the large and persistent declines in standards of living that often follow financial crises.

As financial institutions and their activities increasingly cross national boundaries, it has become more challenging to effectively monitor associated risks. Consolidating the monitoring and supervision of these financial conglomerates has become critical for detecting risks to financial stability. Other priorities include ensuring harmonized institutional and regulatory frameworks, regional information sharing, and arrangements for failing financial institutions that are intertwined across borders.

Approach

In recent years, the IMF has extended its knowledge sharing to address risks to the financial system as a whole — what it calls macroprudential oversight — and an increasing number of emerging and developing markets in Asia have been taking steps to institute a systematic approach to monitoring financial stability. This approach includes establishing dedicated financial stability functions and building internal systems and technical skills.

The IMF works with countries on four principal components of an effective financial stability framework: organizational structure, monitoring, analysis, and policy. Ultimately, an effective financial stability framework leads to a policy response that is targeted, clearly defined and communicated, coordinated with all relevant agencies, and supported by crisis management and resolution arrangements. Most of all, it helps to define accountability and clarify responsibilities during periods of stress and instability.

Impact

Indonesia, the Philippines and Thailand are among the key Asian emerging economies that have been working assiduously to enhance their financial stability frameworks. Authorities have leveraged IMF’s advice to strengthen the systemic oversight framework and risk analysis. The Bank of Thailand recently inaugurated its own Financial Stability Unit. The Philippines’ Central Bank (BSP) is in the process of setting up a dedicated financial stability function. The Bank of Indonesia is developing capacity for performing systemic risk assessment, macroprudential oversight and stress testing.

Looking ahead, it is clear that emerging market and developing countries in Asia will continue to make significant in their respective approaches to safeguarding financial stability. The IMF will continue to support these efforts and work with them to advance their stability agendas.