## _wp1438

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---

### Introduction and Context
- Scope:
  - Examines why Asia was relatively resilient during the Global Financial Crisis (GFC) compared with the Asian Financial Crisis (AFC) and with other regions.
  - Uses OLS regressions to estimate the marginal impact of each factor on resilience.
  - Focus on "financial and external vulnerabilities" and "initial conditions" as determinants of output performance.
- Contextual timeline and data notes:
  - U.S. subprime loan defaults began in 2007, precipitating the GFC.
  - Liquidity conditions deteriorated toward the end of October 2008 (Figure 1).
  - Major advanced economies "ground to a halt in the fourth quarter of 2008" and Asia suffered sharp output declines in the ensuing global credit crunch (Figure 12).
- Primary transmission channels to Asia highlighted:
  - Capital flight: "BIS-reporting banks’ cross-border claims on Asia declined by about 15 percent between the third quarter of 2008 and the first quarter of" (ellipsis in source).
  - Trade financing dried up and worldwide demand plunged.

### I. Impact of the Global Financial Crisis (GFC) on Asia — Key Findings
- Trade and production:
  - Exports fell by 30 percent between September 2008 and February 2009.
  - Industrial production fell by a record 16 percent for export dependent economies (Hong Kong SAR, Malaysia, Singapore, Thailand).
  - Industrial production fell by about 1 percent for the four larger economies (Australia, China, India, Indonesia).
- Real GDP and output:
  - Real GDP (Asia, excluding China and India) fell by 11 percent in the fourth quarter of 2008 (annualized).
  - Fell by a further 8 percent in the first quarter of 2009 (annualized).
  - Output shrank for Asia as a whole for two consecutive quarters.
- Exchange rates and labor markets:
  - Nominal effective exchange rates depreciated significantly in Australia, Korea, India, Indonesia, and New Zealand; depreciations were smaller and smoother than during the AFC.
  - Unemployment rates generally contained; only New Zealand saw rates increase significantly, by about 2½ percentage points.
- Banking and capital flows:
  - Deleveraging in 2009 mostly by European banks, reducing consolidated claims in virtually all Asian countries.
  - BIS-reporting banks’ cross-border claims on Asia rose from a trough in early 2009 to a new high in late 2010 (recovery within 6 quarters).
  - By end-2011, worldwide cross-border claims of international banks on Asia reached a new high while claims on other parts of the world were still 10 percent lower than the pre-crisis level.
  - Korea was the only country with claims about 20 percent below its pre-crisis level (reflecting reduced reliance on foreign wholesale funding).
- Financial stability outcome:
  - Asia’s financial sector remained stable through the crisis; there were no full blown banking or balance of payment crises during the GFC for Asian countries.

### II. Policy Responses During the GFC
- Fiscal and monetary stimulus:
  - Large fiscal stimulus packages amounting to 3-5 percentage points on a cyclically adjusted basis.
  - Aggressive monetary easing through cuts in policy rates or reserve requirements.
  - Central banks introduced unprecedented liquidity support measures and guarantees.
- Macroprudential and regulatory actions:
  - Restrictions on loan-to-value, debt-to-income and credit growth.
  - Limits on currency and maturity mismatches.
  - Adjustments in reserve requirements and risk weights.
  - Strengthened banking supervision and prudential regulation, especially post-AFC.

### III. Structural and Pre-crisis Strengths Underpinning Resilience
- Financial sector indicators:
  - Private sector credit growth in the five years preceding the GFC was modest compared to advanced countries.
  - Credit to deposit ratios were around or below 100 percent in most Asian countries before the GFC.
  - Banking systems were well capitalized with high quality (common equity tier-1) capital.
  - Nonperforming loans were a small share of total loans; exposure to subprime and structured credit products was minimal.
  - Banks predominantly held a net foreign asset position, reducing vulnerability to external funding squeezes.
- External position and buffers:
  - Most countries were running current account surpluses, ranging from 2 percent of GDP to more than 25 percent (exceptions: Australia, New Zealand, Vietnam ran deficits >5 percent of GDP).
  - In 2007, net external debt was about 25 percent of GDP or less except for Australia and New Zealand.
  - Ratio of short-term external debt to foreign reserves was below 100 percent for nine Asian countries (only Hong Kong SAR above 100 percent but with a strong net foreign asset position).
  - Stock of foreign reserves had been built up significantly after the AFC.

### IV. Quantitative Assessment of Asia’s Resilience
- Measurement of output performance:
  - Depth: peak-to-trough decline.
  - Length: quarters to recover to 2008Q3 level (cut-off at 2010Q4).
  - Cumulative loss: relative to 2008Q3 level.
- Asia "effect" versus rest of world:
  - Depth of output decline smaller by 2.8 percentage points.
  - Recovery to the 2008Q3 output levels more than 3 quarters quicker.
  - Cumulative output loss lower by 11 percent of annualized 2008Q3 GDP.
- Empirical contributions of vulnerabilities:
  - Financial vulnerabilities (especially credit growth) and external vulnerabilities explain substantial cross-country differences in output performance during the GFC.
  - Change in credit to GDP:
    - Modest pre-GFC credit expansion in Asia can account for about 40 percent of the difference in cumulative output loss vis-à-vis non-Asian economies.
  - External vulnerability indicators:
    - Level of external debt and foreign reserves individually able to explain about 40-45 percent of the difference in cumulative output loss between Asia and non-Asian economies.
  - Combined (preferred multivariate specifications):
    - Lower financial and external vulnerabilities in Asia account for about 60-84 percent of the difference in cumulative output loss vis-à-vis Europe.
    - Lower financial and external vulnerabilities in Asia account for about 49-65 percent of the difference vis-à-vis Western Hemisphere.
- Counterfactual: if Asia had pre-AFC vulnerabilities:
  - Cumulative output loss would have been larger by 4 percentage points given the rapid increase in credit to GDP pre-AFC.
  - Larger by 5 percentage points after incorporating dependence on wholesale funding and smaller foreign reserve buffers.

### V. Recent Risks and Near-term Vulnerability (post-GFC up to 2013)
- 2013 market episode (Fed taper concerns) — end-May to end-August 2013:
  - Indian rupee depreciated by 24 percent.
  - Indonesian rupiah depreciated by 15 percent.
  - Rest of emerging and advanced Asia depreciated by 3 percent.
  - Reserve losses:
    - Indonesia lost about 14 percent of foreign reserves.
    - India lost about 6 percent of foreign reserves.
- Changes in initial conditions (selected Table 6 lines; Pre-GFC versus Today):
  - Change in credit to GDP: Pre-GFC: -1.6; Today: 3.7.
  - Increase in bank NPLs to total loans: Pre-GFC: -7.0; Today: -2.3.
  - Credit to deposit ratio: Pre-GFC: 88.2; Today: 86.2.
  - Banking system's net foreign assets: Pre-GFC: 7.8; Today: 5.7.
  - Gross external debt: Pre-GFC: 16.2; Today: 16.5.
  - Net external debt: Pre-GFC: -5.4; Today: 2.7.
  - Foreign reserves to short-term debt: Pre-GFC: 440.9; Today: 358.6.
  - Current account deficit: Pre-GFC: -5.7; Today: -1.2.
- Overall assessment:
  - Financial vulnerabilities have not changed enough to make a significant difference to resilience.
  - Deterioration in external factors is more broad based and consistent with a weakening in resilience.
  - Applying estimated coefficients to pre-GFC and end-2012 initial conditions shows Asia’s output resilience has weakened relative to the pre-GFC period.

### VI. Policy Implications and Recommendations
- Preserve and strengthen prudential and macroprudential frameworks:
  - Moderate credit expansion and reduce leverage to align with economic fundamentals.
  - Use loan-to-value, debt-to-income limits, reserve requirement adjustments, and risk weight changes.
  - Strengthen banking supervision to contain asset quality deterioration and risky funding profiles.
- External buffers and exchange rate policies:
  - Maintain adequacy of foreign reserves to cushion sudden capital flow reversals.
  - Allow exchange rates to act as shock absorbers where appropriate, while ensuring adequate liquidity support and swap lines when needed.
- Manage external financing risks:
  - Monitor and limit reliance on non-FDI and wholesale funding to reduce rollover and currency mismatches.
- Regional and demand-side considerations:
  - Continue regional cooperation and leverage positive trading-partner dynamics (notably China) to sustain demand during global downturns.
- Ongoing vigilance:
  - Continued strengthening of initial conditions and active use of macroprudential and regulatory tools to fortify resilience against future shocks.

### VII. Box 1 — The AFC and Post-Crisis Reform (summary)
- AFC trigger and recovery:
  - Triggered in July 1997 when Thailand depleted foreign reserves defending the baht.
  - Real GDP recovery to pre-crisis levels occurred in 1999.
  - Five most affected: Indonesia, Korea, Malaysia, the Philippines, Thailand.
- Principal vulnerabilities identified pre-AFC:
  - Strong private capital inflows, large unhedged foreign currency liabilities, high corporate leverage.
  - Tightly managed exchange rates, currency and maturity mismatches, insufficient foreign reserves.
  - Weak banking supervision, imprudent lending, rapid credit expansion leading to substantial NPLs.
- Post-crisis reforms implemented across countries:
  - New laws and institutions, bank recapitalizations, removal/sale of legacy NPLs.
  - Revamped risk management, corporate governance, disclosure, and strengthened supervisory powers.
  - Large buildup of foreign reserves as a policy buffer.
  - Private sector deleveraging and improved corporate governance restored profitability over time.
- Role of buffers:
  - Research cited (Aizenman, Pinto, Sushko (2012)) concludes foreign reserve buffers mitigate real economy effects from abrupt financial contractions.
  - Foreign reserves declined by 0.8 percent of GDP during 1997-2007.

### VIII. Appendix Tables and Selected Data Excerpts (highlights)
- Appendix Table excerpts include FX Market Pressure / Deleveraging / Real Export Growth, Fiscal Balance / Government Debt / Foreign Reserves / Nominal Exchange Rate Volatility, Credit Expansion / Bank Funding / Corporate Sector Strength, and External Vulnerabilities.
- Selected numeric excerpts (as presented in tables):
  - Countries and selected indicators show wide variation across AFC and GFC episodes (table lines preserved in source text; examples include Indonesia, Malaysia, Korea, Philippines, Thailand, Australia, Japan, New Zealand, Hong Kong SAR, Singapore, Taiwan Province of China, China, India, Vietnam).
  - Notes and sources: BIS, Locational Banking Statistics; Haver Analytics; IMF, Information Notice System; International Financial Statistics; World Economic Outlook database; IMF staff calculations.

### IX. Appendix IV — Recent FSAPs in Asia (country findings and key recommendations)
- China (2011 FSAP findings and recommendations):
  - Findings: Financial sector entered the GFC from a position of relative strength; steady buildup of financial sector vulnerabilities.
  - Recommendations include: advance interest rate and exchange rate reform; delineate roles of policy vs commercial financial institutions; empower PBC and supervisory commissions; develop regulation for financial holding companies; build macroprudential framework; introduce deposit insurance; review insolvency laws.
- Australia (2012 FSAP Update):
  - Findings: Financial system sound and resilient; dominated by four large banks reliant on foreign wholesale funding; high household debt and elevated house prices.
  - Recommendations include: develop top down stress testing; devote more resources to stress testing; introduce higher loss absorbency for systemic banks; intensify on-site supervision of bank liquidity; re-evaluate ex-ante funding for the FCS; conduct crisis simulations and resolution planning.
- Japan (2012 FSAP Update):
  - Findings: Important progress since 2003; restructuring, reduced NPLs, improved capital and supervision helped withstand severe output contraction.
  - Recommendations include: close monitoring and contingency planning for JGB market and regional bank vulnerabilities; enhance systemic and macroprudential oversight; deepen cross-border risk monitoring; pursue broad-based financial reform.
- India (2012 FSAP):
  - Findings: Remarkable progress but build-up of vulnerabilities; main near-term risks are worsening bank asset quality and pressures on systemic liquidity.
  - Recommendations include: greater de jure independence of regulators; consolidated supervision of conglomerates; reduce large exposures and related-party lending; enhance RBI monitoring of corporate indebtedness; strengthen oversight of public financial institutions; strengthen resolution tools.
- Indonesia (2010 FSAP):
  - Findings: Decisive response and decade of reforms aided quick recovery; concerns remain on rule of law, transparency, governance.
  - Recommendations include: strengthen capital quality and provisioning norms; enhance consolidated supervision and home-host cooperation; submit prompt corrective action legislation; strengthen stress testing; increase deposit insurance fund; enhance legal protection for supervisors.
- Malaysia (2013 FSAP):
  - Findings: Financial system weathered the crisis well; limited cross-border funding reliance; banks well capitalized; risks from rapid loan growth, rising house prices, high household leverage.
  - Recommendations include: enhance monitoring of household leverage; adopt multi-year stress testing; strengthen consolidated supervision and regulatory frameworks; implement proposed Financial Services Act and Islamic Financial Services Act; formalize high-level systemic risk committee.
- Philippines (2010 FSAP Update):
  - Findings: Banking sector strengthened considerably and generally resilient; progress on bank supervision and resolution framework.
  - Recommendations include: establish a credit bureau with positive and negative information; expand legal protection for supervisory staff; amend banking and central banking laws to empower BSP; reform PCA and resolution mechanisms; enable bridge bank resolution.
- Thailand (2008 FSAP):
  - Findings: Soundness strengthened since late 1990s; banks vulnerable to significant slowdown in domestic growth; liquidity risk material for a few banks.
  - Recommendations include: passage of legal reforms for supervisory framework; improve inter-agency coordination; transition from blanket guarantee to limited deposit insurance; reduce government equity stakes in private banks; reduce NPLs and distressed assets; monitor and identify NPLs accurately; provide tax incentives for writing off NPLs.

*Source: _wp1438.*

### References .............................................................................................................

### References

### Tables and Figures Inventory
- Tables listed:
  - 1. Regions: Change in Fiscal Balance, 2007-2009
  - 2. Initial Conditions
  - 3. Output Performance and Initial Conditions Based on Financial and External Vulnerabilities
  - 4. Estimated Impact of Initial Conditions on Output Performance
  - 5. Estimated Impact on Output Performance if Asia were to have Weak Initial Conditions similar to those before the Asian Financial Crisis
  - 6. Estimated Impact on Output Performance if Asia were to have Today Initial Conditions
- Figures listed (selection and numbering preserved):
  - 1. Interbank Spreads, 2006-2011
  - 2. Asia: Financial and Trade Shocks during the Global Financial Crisis
  - 3. Asia: Current Account Adjustments and Exchange Rate Movements
  - 4. Banking Crises and Credit Growth
  - 5. Subprime Market Losses and Writedowns
  - 6. Real GDP Growth and Partners’ Economic Performance, 2009-2010
  - 7. Real GDP, 2012 H1
  - 8. Measuring Output Performance
  - 9. Output Performance and Shocks during the Global Financial Crisis
  - 10. The Relative Importance of Financial and External Vulnerabilities in Explaining Differences in Output Performance between Asia and Other Regions
  - 11. Exchange Rates, 2013
  - 12. Global Financial Market Conditions
  - 13. Asia: Financial and Trade Shocks during the Global Financial Crisis
  - 14. Asia: Initial Impact of the Global Financial Crisis
  - 15. Asia: Recovery from the Global Financial Crisis
  - 16. Key Indicators of Macroeconomic Stability
  - 17. Key Indicators of Financial and External Vulnerabilities
- Boxes:
  - 1. The AFC and Post-Crisis Reform
  - 2. The Effect of Initial Conditions on the Likelihood of a Banking Crisis
- Appendices:
  - I. Tables and Figures
  - II. ASEAN-5 Financial Sector Reform Following the AFC
  - III. Initial Conditions Variables and Samples
  - IV. Recent FSAPs in Asia
- Appendix Tables listed:
  - 1. Asia: GDP and Size of Financial Sector, 2007
  - 2. Asia: Effects on Output, Inflation and Unemployment
  - 3. Asia: Stocks
  - 4. Asia: Policy Buffers
  - 5. Asia: Credit Expansion, Bank Funding, and Corporate
  - 6. Asia: External Vulnerabilities

### Introduction and Context
- Scope and framing:
  - The document examines why Asia was relatively resilient during the Global Financial Crisis (GFC) compared with the Asian Financial Crisis (AFC) a decade earlier and with other regions.
  - The marginal impact of each factor on resilience is estimated using OLS regressions.
  - The analysis aims to draw lessons for the future and for completing financial sector reform.
- Contextual timeline and data references:
  - The U.S. subprime loan defaults began in 2007, precipitating the GFC.
  - Liquidity conditions deteriorated toward the end of October 2008, illustrated by Figure 1 (Interbank Spreads, 2006-2011).
  - The economies of major advanced countries "ground to a halt in the fourth quarter of 2008" and Asia suffered a sharp decline in output in the ensuing global credit crunch (Figure 12).

### Key Observations on Asia’s Experience
- Comparative outcomes:
  - Unlike during the AFC, there was "no full-blown financial crisis or sharp destructive external adjustments" in Asia during the GFC.
  - Asia was "relatively resilient and able to preserve systemic stability," while the euro area experienced severe economic and financial distress.
- Country-level performance examples:
  - "Australia, China, and Indonesia continued growing throughout the GFC."
  - "Korea, Malaysia and Singapore" experienced an initial steep decline in output but "posted swift and robust recoveries."
- Primary channels of impact from the GFC to Asia:
  - Capital flight: "BIS-reporting banks’ cross-border claims on Asia declined by about 15 percent between the third quarter of 2008 and the first quarter of" (text truncated in source).
  - Trade financing dried up and worldwide demand plunged, contributing to sharp output declines.

### Methodology and Analytical Focus
- Analytical approach:
  - Use of OLS regressions to estimate the marginal impact of initial conditions on resilience and output performance.
  - Examination of "financial and external vulnerabilities" and "initial conditions" as determinants of outcomes.
- Emphasis in analysis:
  - Determining whether "better initial conditions in Asia helped contribute to its resilience relative to the rest of the world during the GFC."
  - Assessing the "relative importance of financial and external vulnerabilities in explaining differences in output performance between Asia and other regions" (see Figure 10).

### Notable Quantitative and Graphical Elements (as provided)
- Interbank spreads charted as basis points in Figure 1 (2006–2011), with series labeled Dollar, Euro, Yen.
- Timeline markers and years preserved in figures: 2006, 2007, 2008, 2009, 2010, 2011, 2012.
- Explicit quantitative claim preserved:
  - "BIS-reporting banks’ cross-border claims on Asia declined by about 15 percent between the third quarter of 2008 and the first quarter of" (ellipsis in source).

*Source: _wp1438 - References*

### 2009. This was roughly twice the reduction experienced in other regions and

### _wp1438 - 2009. This was roughly twice the reduction experienced in other regions and

### I. Impact of the Global Financial Crisis (GFC) on Asia
- Exports fell by 30 percent between September 2008 and February 2009.
- Industrial production:
  - Fell by a record 16 percent for export dependent economies (Hong Kong SAR, Malaysia, Singapore, Thailand).
  - Fell by about 1 percent for the four larger economies (Australia, China, India, Indonesia).
- Real GDP (Asia, excluding China and India):
  - Fell by 11 percent in the fourth quarter of 2008 (annualized).
  - Fell by a further 8 percent in the first quarter of 2009 (annualized).
- Output shrank for Asia as a whole for two consecutive quarters.
- Exchange rate movements and external adjustments:
  - Nominal effective exchange rates depreciated significantly in Australia, Korea, India, Indonesia, and New Zealand.
  - Depreciations were smaller and smoother than during the AFC.
- Labor markets:
  - Unemployment rates were generally contained; only New Zealand saw rates increase significantly, by about 2½ percentage points.
- Banking and capital flows:
  - Deleveraging in 2009 was mostly carried out by European banks, reducing consolidated claims in virtually all Asian countries.
  - BIS-reporting banks’ cross-border claims on Asia rose from a trough in early 2009 to a new high in late 2010 (recovery within 6 quarters).
  - By end-2011, worldwide cross-border claims of international banks on Asia reached a new high while claims on other parts of the world were still 10 percent lower than the pre-crisis level.
  - Korea was the only country with claims about 20 percent below its pre-crisis level (reflecting reduced reliance on foreign wholesale funding).
- Financial stability:
  - Asia’s financial sector remained stable through the crisis; there were no full blown banking or balance of payment crises during the GFC for Asian countries.

### II. Policy Responses
- Rapid and decisive monetary and fiscal stimulus:
  - Large fiscal stimulus packages amounting to 3-5 percentage points on a cyclically adjusted basis.
  - Aggressive monetary easing through cuts in policy rates or reserve requirements.
  - Central banks introduced unprecedented liquidity support measures and guarantees to ensure financial system functioning.
- Macroprudential and regulatory actions included:
  - Restrictions on loan-to-value, debt-to-income and credit growth.
  - Limits on currency and maturity mismatches.
  - Adjustments in reserve requirements and risk weights.
  - Strengthened banking supervision and prudential regulation, especially following the AFC.

### III. Structural and Pre-crisis Strengths Underpinning Resilience
- Lower financial and external vulnerabilities relative to many other regions due to reforms after the AFC:
  - Private sector credit growth in the five years preceding the GFC was modest compared to advanced countries.
  - Credit to deposit ratios were around or below 100 percent in most Asian countries before the GFC.
  - Banking systems were well capitalized with high quality (common equity tier-1) capital.
  - Nonperforming loans were a small share of total loans; exposure to subprime and structured credit products was minimal.
  - Banks predominantly held a net foreign asset position, reducing vulnerability to external funding squeezes.
- External position:
  - Most countries were running current account surpluses, ranging from 2 percent of GDP to more than 25 percent (exceptions: Australia, New Zealand, Vietnam ran deficits >5 percent of GDP).
  - In 2007, net external debt was about 25 percent of GDP or less except for Australia and New Zealand.
  - Ratio of short-term external debt to foreign reserves was below 100 percent for nine Asian countries for which data is published (only Hong Kong SAR above 100 percent but with a strong net foreign asset position).
  - Stock of foreign reserves had been built up significantly after the AFC.

### IV. Quantitative Assessment of Asia’s Resilience
- Measurement approach:
  - Output performance measured using depth (peak-to-trough decline), length (quarters to recover to 2008Q3 level, cut-off at 2010Q4), and cumulative loss (relative to 2008Q3 level).
- Asia “effect” (average comparison to rest of world):
  - Depth of output decline smaller by 2.8 percentage points.
  - Recovery to the 2008Q3 output levels more than 3 quarters quicker.
  - Cumulative output loss lower by 11 percent of annualized 2008Q3 GDP.
- Empirical findings on the role of vulnerabilities:
  - Financial vulnerabilities (especially credit growth) and external vulnerabilities explain substantial cross-country differences in output performance during the GFC.
  - Change in credit to GDP:
    - Identified as the most important financial factor; the modest pre-GFC credit expansion in Asia can account for about 40 percent of the difference in cumulative output loss vis-à-vis non-Asian economies.
    - Estimated bivariate regression coefficients show statistically significant relationships (see Table 3 and Table 4 for detailed coefficients).
  - External vulnerability indicators:
    - Level of external debt and foreign reserves individually able to explain about 40-45 percent of the difference in cumulative output loss between Asia and non-Asian economies.
  - Combined contribution (preferred multivariate specifications):
    - Lower financial and external vulnerabilities in Asia account for about 60-84 percent of the difference in cumulative output loss vis-à-vis Europe.
    - Lower financial and external vulnerabilities in Asia account for about 49-65 percent of the difference vis-à-vis Western Hemisphere.
- Counterfactual scenario (if Asia had pre-AFC vulnerabilities):
  - If initial conditions resembled those before the AFC, Asia’s cumulative output loss relative to the 2008Q3 annualized output level would have been larger by 4 percentage points given the rapid increase in credit to GDP pre-AFC, or by 5 percentage points after incorporating dependence on wholesale funding and smaller foreign reserve buffers.

### V. Recent Risks and Near-term Vulnerability (post-GFC up to 2013)
- Market turbulence in 2013 (Fed taper concerns) demonstrated renewed sensitivity:
  - From end-May to end-August 2013:
    - Indian rupee depreciated by 24 percent.
    - Indonesian rupiah depreciated by 15 percent.
    - Rest of emerging and advanced Asia depreciated by 3 percent.
  - Reserve losses during the episode:
    - Indonesia lost about 14 percent of foreign reserves.
    - India lost about 6 percent of foreign reserves.
- Shifts in initial conditions between pre-GFC and end-2012 / “Today” (Table 6 highlights):
  - Change in credit to GDP:
    - Pre-GFC: -1.6
    - Today: 3.7
  - Increase in bank NPLs to total loans:
    - Pre-GFC: -7.0
    - Today: -2.3
  - Credit to deposit ratio:
    - Pre-GFC: 88.2
    - Today: 86.2
  - Banking system's net foreign assets:
    - Pre-GFC: 7.8
    - Today: 5.7
  - Gross external debt:
    - Pre-GFC: 16.2
    - Today: 16.5
  - Net external debt:
    - Pre-GFC: -5.4
    - Today: 2.7
  - Foreign reserves to short-term debt:
    - Pre-GFC: 440.9
    - Today: 358.6
  - Current account deficit:
    - Pre-GFC: -5.7
    - Today: -1.2
- Overall assessment:
  - Financial vulnerabilities have not changed enough to make a significant difference to resilience, positive or negative.
  - Deterioration in external factors is more broad based and consistent with a weakening in resilience.
  - Applying estimated coefficients to pre-GFC and end-2012 initial conditions shows Asia’s output resilience has weakened relative to the pre-GFC period.

### VI. Policy Implications and Lessons
- Maintain and strengthen:
  - Policies that moderate credit expansion and reduce leverage to align with economic fundamentals.
  - Prudential regulation and supervision to contain asset quality deterioration and risky funding profiles.
  - Adequacy of foreign reserves to cushion sudden capital flow reversals.
  - Macroprudential tools (loan-to-value, debt-to-income limits, reserve requirement adjustments, risk weight changes) as an essential component of the financial stability toolkit.
- Allow exchange rates to act as shock absorbers where appropriate, while ensuring adequate liquidity support and swap lines when needed.
- Monitor and manage external financing reliance, especially non-FDI and wholesale funding, to limit rollover and currency mismatches.
- Continue regional cooperation and leverage positive trading-partner dynamics (notably China) to sustain demand during global downturns.

### VII. Conclusion
- Asia entered the GFC from a stronger position because of reforms and policy changes following the AFC: moderated credit expansion, reduced leverage, improved asset quality, more sustainable current account balances, and larger foreign reserve buffers.
- These financial and external strengths, combined with decisive policy responses and regional demand dynamics (notably from China), explain most of Asia’s relative resilience during the GFC.
- The GFC and subsequent market episodes (e.g., 2013 taper episode) underscore the need for ongoing vigilance, continued strengthening of initial conditions, and active use of macroprudential and regulatory tools to fortify resilience against future shocks.

*Source: _wp1438 - 2009. This was roughly twice the reduction experienced in other regions and*

### Box 1. The AFC and Post-Crisis Reform

### Box 1. The AFC and Post-Crisis Reform

### Trigger, affected countries, and recovery
- The AFC was triggered in July 1997 when Thailand depleted its foreign reserves in defense of the baht which came under severe speculative attack.
- It was not until 1999 when real GDP recovered to its pre-crisis levels.
- The five Asian countries most severely and directly affected by the AFC were Indonesia, Korea, Malaysia, the Philippines, and Thailand.

### Key causes and vulnerabilities identified
- Strong private capital inflows fueled a domestic demand boom, built up large unhedged foreign currency liabilities, and led to highly leveraged corporations.
  - Private domestic credit, funded by capital inflows, increased substantially and fueled an unsustainable increase in real estate and stock prices.
  - In most cases, the capital inflows were short-term and denominated in foreign currency, increasing the vulnerability to sudden stops.
- Tightly managed exchange rates made countries vulnerable to speculative attacks on their currencies.
  - There were widespread currency and maturity mismatches, mainly due to the false impression that the exchange rate risk was small or nonexistent.
  - Foreign reserves were not large enough to fully support fixed exchange rates, with short-term external debt exceeding foreign reserves in Indonesia, Korea, the Philippines, and Thailand.
  - Several countries ran substantial and persistent current account deficits.
- The banking systems were highly vulnerable as a result of insufficient oversight following earlier liberalization.
  - Many banks had inadequate risk management practices, while banking supervision was lax and financial legislation and regulation were lagging.
  - Imprudent bank lending and loan portfolio risk management resulted in rapid credit expansion that eventually ended with substantial nonperforming loans.

### Post-crisis financial sector reforms and policy responses
- Comprehensive reforms were undertaken across affected and less directly affected Asian countries:
  - New laws and institutions were introduced to fill identified gaps in the regulatory and supervisory framework.
  - Failed institutions were closed while the remaining viable banks were recapitalized and their legacy nonperforming loans removed and sold to restore profitability.
  - Risk management policies, including rules on corporate governance and disclosure, were revamped with stiffer penalties for unsafe and unsound banking practices and expanded supervisory powers to intervene and conduct regular examinations.
  - Among advanced economies, investment in modern market infrastructure became a priority to ensure the financial sector was able to cope with the demands of a rapidly growing region.
  - Many Asian countries have built up their stock of foreign reserves to provide a cushion against adverse external shocks.
- The private sector also adjusted:
  - The private sector, including banks and corporations, strengthened their balance sheets, and credit growth was contained.
  - In the short-term, rapid balance sheet restructuring was reflected in a sharp decline in banks’ credit to the private sector, particularly in Indonesia, Malaysia, and Thailand.
  - Over time, financial institutions cleaned up their balance sheets, improved risk management, and became more prudent in their risk taking and lending.
  - Corporations undertook substantial deleveraging, enhanced corporate governance, and became more conservative in undertaking investment, which eventually restored corporate profitability, along with better transparency and competitiveness.

### Assessment by international programs and outcomes by the GFC
- In the late 2000s, the IMF’s financial sector assessment programs (FSAPs) gave Asia high marks for strengthening its supervisory and regulatory regime in line with Basel Core Principles.
- By the time of the GFC, Asia’s financial sector was in good health, and the supervisory and regulatory regimes for banking, insurance and securities were well developed and on par with international standards.

### Evidence on buffers and reserves
- Aizenman, Joshua, Brian Pinto, Vladyslav Sushko (2012) examines episodes of financial sector booms and contractions, and conclude that the effects on real economy from abrupt financial contractions are mitigated by buffers of foreign reserves.
- Foreign reserves declined by 0.8 percent of GDP during 1997-2007.

*Sources: IMF, International Financial Statistics; and IMF staff calculations.*

### Appendix Table 3. Asia: Stocks

### Appendix Table 3. Asia: Stocks

### Tables excerpt: FX Market Pressure / Deleveraging / Real Export Growth
- Header line: AFCGFCAFCGFC 1997-982008-091997-982008-091997-992008-092008-10
- Countries severely hit by the AFC
  - Indonesia9. 5-0.16411606. 618. 56.8-14. 5
  - Malaysia3.0-4.760112214.823.124.210.0
  - Korea16.32.749616621.829.222.211.1
  - Philippines-1.9-5.3452128-1.0-0.411.0-19.4
  - T hailand7.7-3.763315529.852.4-4.3-46.8
- Advanced economies
  - Australia6.22.892167-1.4-17.15.9-4.0
  - Japan4.2-11.414516912.729.5-1.6-7.4
  - New Zealand2.80.71291417.8-10.8-53.4-5.6
- Newly industrialized countries
  - Hong Kong SAR0.2-3.835918415.041.710.8-12.6
  - Singapore3.0-1.527717110.820.022.410.4
  - Taiwan Province of China5.2-3.9......3.616.033.3-13.9
- Emerging market economies
  - C hina23.1-0.1...128-6.16.424.0-38.0
  - India4.75.1169198-2.30.412.4-20.5
  - Vietnam16.58.1......3.86.56.4-11.9
- Notes:
  - Sources: BIS, Locational Banking Statistics; Haver Analytics; IMF, Information Notice System, International Financial Statistics, and World Economic Outlook database; and IMF staff calculations.
  - 1/ Based on a weighted average of 12-month volatility of changes in the nominal effective exchange rate, foreign reserves and money-market interest rates.
  - 2/ Based on the decline in cross-border claims of BIS-reporting banks.

### Tables excerpt: Fiscal Balance / Government Debt / Foreign Reserves / Nominal Exchange Rate Volatility
- Header line: AFCGFCAFCGFCAFCGFCAFCGFC 1996200719962007199620071996-972007-08
- Countries severely hit by the AFC
  - Indonesia1.2-1.0...35.18.012.71.02.9
  - Malaysia2.0-2.735.741.226.852.21.40.8
  - Korea2.52.38.630.75.925.01.04.7
  - Philippines0.6-0.354.744.611.020.20.75.7
  - T hailand2.70.214.937.320.734.50.31.7
- Advanced economies
  - Australia-0.91.329.39.73.42.62.95.2
  - Japan-5.5-2.199.0183.04.621.97.35.9
  - New Zealand2.53.239.117.28.713.00.64.2
- Newly industrialized countries
  - H ong Kong SAR2.17.7...30.139.572.10.40.7
  - Singapore8.712.270.787.380.991.50.30.7
  - T aiwan Province of C hina-6.8-1.4...33.3......0.91.0
- Emerging market economies
  - C hina-1.50.96.819.612.543.80.91.2
  - India-5.8-4.868.775.05.423.01.33.4
  - Vietnam...-2.2...44.67.033.01.51.6
- Note:
  - 1/ Variance of monthly exchange rate movements over 12 months: July 1996 - June 1997 and September 2007 - August 2008.
  - Sources: IMF, International Financial Statistics, Information Notice System, and World Economic Outlook database; and IMF staff calculations.

### Tables excerpt: Credit Expansion, Bank Funding, and Corporate Sector Strength (selected lines)
- Header line: AFCGFCAFCGFCAFCGFCAFCGFCAFCGFCAFCGFC 1992-962003-071992-962003-0719962007199620071997200819972008
- Countries severely hit by the AFC
  - Indonesia6.86.59.25.0120.072.52.61.142.825.38.627.3
  - Malaysia69.6-29.210.16.8137.197.44.3-0.928.325.617.111.6
  - Korea3.014.87.53.3147.8125.62.71.053.825.519.111.9
  - Philippines27.4-2.14.73.3103.364.110.0-6.438.729.721.418.7
  - T hailand60.0-13.88.15.3192.1110.118.1-6.058.227.439.613.3
- Newly industrialized countries
  - Hong Kong SAR20.0-8.36.54.295.747.5-3.3-28.724.718.63.211.0
  - Singapore14.5-17.28.05.5125.282.98.3-0.815.822.41.216.0
  - T aiwan Province of C hina0.018.76.72.8101.8101.6-0.3-2.826.821.60.012.7
- Emerging market economies
  - China2.1-13.913.010.8105.780.80.4-3.326.425.76.130.5
  - India0.314.45.49.766.774.5......29.724.03.21.2
  - Vietnam18.750.212.110.4150.7103.3-0.2-1.8...24.4...46.1
- Note:
  - Sources: IMF, Corporate Vulernability Utility based on WorldScope database, International Financial Statistics and World Economic Outlook; and IMF staff calculations.
  - 1/ For Vietnam, the AFC figure is 1993-1996.
  - 2/ Probability of default over the one-year ahead period based on the Black-Scholes-Merton model.
  - Column headings include: Change in Private Domestic Credit to GDP (percentage points); Real Domestic Demand Growth 1/ (percent; annualized); Private Domestic Credit to Resident Deposits (percent); Bank Net Foreign Liabilities to Total Assets (percent); Corproate Leverage: Debt to Total Assets (percent); Corporate Sector Probability of Default 2/ (percent).

### Tables excerpt: External Vulnerabilities (selected lines)
- Header line: AFCGFC AFCGFC AFCGFC AFCGFC 199620071994-962005-0719972008199720081995-972006-08
- Countries severely hit by the AFC
  - Indonesia3.2-1. 613.20.967.630.4216.656.711.73.3
  - Malaysia4.4-15. 419.7-19.944.029.671.936.69.43.6
  - Korea4.0-2. 19.70.931.434.1147.289.50.2-17.1
  - Philippines4.2-4.829.74.754.837.5191.543.121.716.1
  - T hailand7.9-6. 332.27.572.427.9180.534.214.94.6
- Newly industrialized countries
  - H ong Kong SAR2.5-12. 1-9.8-31.9...301.1......15.7-10.8
  - Singapore-14.8-26.1-29.3-34.1............5.75.6
  - T aiwan Province of C hina-3.8-8. 9-6.5-13.9...22.6......0.7-5.3
- Emerging market economies
  - C hina-0.8-10. 115.88.313.78.620.013.422.115.4
  - India1.60. 76.515.422.218.049.622.910.63.7
  - Vietnam8.29. 831.035.451.830.5...18.412.716.7
- Note:
  - Sources: IMF, Information Notice System and World Economic Outlook database; and IMF staff calculations.
  - Column headings include: Current Account Deficit (percent of GDP); Accumulated Net Capital Inflows (percent of GDP); External Debt (percent of GDP); Short-term Debt to Foreign Reserves 1/ (percent); Real Exchange Rate Appreciation 2/ (percent).
  - 1/ For Korea, the AFC figure is 1998.
  - 2/ Real exchange rate appreciation over 26 months: April 1995 - June 1997 and June 2006 - August 2008.

### Appendix II: ASEAN-5 Financial Sector Reform following the AFC — policy measures by country
- Indonesia
  - Amendments to the banking law
    - Modify requirements regarding bank secrecy.
    - End restrictions on foreign ownership of banks.
    - Enable the Indonesian Bank Restructuring Agency to transfer assets and to foreclose against a nonperforming debtor.
  - Strengthening the prudential and regulatory framework
    - New regulations regarding loan classification; loan provisioning: and the treatment of debt restructuring operations.
    - New liquidity management reporting requirements. Banks required to submit a liquidity report twice monthly for their global consolidated operations, including the foreign currency liquidity profile, and actions to the bank intends to take to cover any liquidity shortfall or absorb any liquidity surplus.
    - New regulations to tighten rules for connected lending.
    - Disclosure of financial statements. Banks required to publish their financial statements quarterly, beginning April 1999.
  - Banks resolution framework
    - The Deposit Insurance Corporation, Lembaga Penjamin Simpanan (LPS) Law of 2004 established a coordination committee comprising the Ministry of Finance, the Bank of Indonesia and the LPS to determine the policy for the resolution and handling of a failing bank that is expected to have a systemic effect.
- Korea
  - Reforms of institutional arrangements, based on Presidential Commission on Financial Reform in 1997
    - Significantly strengthened the independence of the Bank of Korea.
    - Consolidated financial sector supervision in a single Financial Supervisory Commission and unified supervisory authority by the Financial Supervisory Service separate from the government.
    - Legislation to grant the Financial Supervisory Commission power to license and de-license financial institutions, as well as to supervise specialized and development banks.
    - Merging deposit insurance protection agencies into the new Korea Deposit Insurance Corporation, which was provided with powers and funds to pay back deposits in failed institutions and, if necessary, to also provide recapitalization funds to banks.
    - Establishment of a Financial Restructuring Unit within the Financial Supervisory Commission to oversee and coordinate the restructuring of the financial sector.
  - Strengthened prudential standards and supervision procedures
    - New loan classification standards and provisioning rules under which loans more than three months overdue will be classified as substandard, and the general provisioning requirement was increased.
    - Regulations to require the provisioning for securities losses and to cease the inclusion in Tier 2 capital of all provisions for nonperforming loans.
    - Loan classification and provisioning guidelines to take into account a borrower’s future capacity to repay in classifying and provisioning loans.
    - Strengthened prudential supervision and regulation of foreign exchange operations by commercial and merchant banks, including requiring short-term assets to cover at least 70 percent of short-term liabilities, and long-term borrowing to cover more than 50 percent of long-term assets.
    - Banks to maintain overall foreign currency exposure limits per counterparty, including foreign currency loans, guarantees, security investments, and offshore finance.
    - A maturity ladder approach requiring banks to report maturity mismatches for different time brackets, and with limits on mismatches.
    - Exposure limits to single borrowers and groups and regulations for connected lending were tightened.
    - Full foreign ownership of merchant banks allowed.
- Malaysia
  - Measures to strengthen the financial sector introduced in 1998
    - Stricter loan classification and provisioning standards. Classification standards to be brought to best practice standards; 20 percent provisioning requirement against uncollateralized portions of substandard loans; off-balance sheet items incorporated in the loan classification and provisioning system.
    - Tightened rules for accounting interest in suspense, such that banks would be required to reverse unpaid interest out of income and record it in the interest-in-suspense account.
    - Tighter capital adequacy framework. Increased risk-weighted capital adequacy requirements of finance companies from 8 percent to 10 percent; minimum capital for finance companies increased from 5 million ringgit to 300 million ringgit; compliance with capital adequacy requirement required each financial quarter.
    - Single borrower limit reduced from 30 percent to 25 percent of capital funds.
    - Aggregate statistics on nonperforming loans, provisions, and capital positions for all financial institutions to be published monthly by the Bank Negara Malaysia.
    - All institutions to report and publish key indicators of financial soundness on a quarterly basis. Banks required to report on the ratio of nonperforming loans broken down into substandard, doubtful, and loss; loans by sectors on a quarterly basis.
    - More intensive and rigorous supervision of banks through monthly stress tests by Bank Negara Malaysia and a requirement for similar exercises by individual institutions on the basis of parameters set by Bank Negara Malaysia.
    - A prudentially based framework for assessing bank liquidity risks was introduced, effective August 2, 1998.
    - Bank Negara Malaysia-facilitated merger program of finance companies on market-based criteria.
    - Ten-year Financial Sector Masterplan for 2001–2010
      - Bank merger program designed to take advantage of economies of scale and to determine an exit strategy for the weakest banks. Domestic banks given broad flexibility to form their own merger groups.
      - Changes to regulation, and supervision, in line with best practices, including implementing risk-based supervision with more focused supervisory attention for weak institutions; refined calculation of risk weightings for capital adequacy; implementation of a system of incremental enforcement action; and early warning system.
- Philippines
  - Broad financial sector reform program
    - Raised minimum capital requirements for banks, and phased out lower capital requirements for certain universal banks.
    - Banks required to make a general loan loss provision of 2 percent and specific loan-loss, provisions of 5 percent for loans especially mentioned, and 25 percent for secured substandard loans.
    - The Bangko Sentral ng Pilipinas requiring banks to start marking to market their trading securities portfolio.
    - All banks listed on the Philippine Stock Exchange instructed to publicly disclose detailed information on a quarterly basis, including the level of nonperforming loans, and the ratio of nonperforming loans to the total loan portfolio.
    - Consolidated supervision of financial conglomerates.
    - Stricter licensing guidelines for establishing banks, focusing on the statement of income and expenses; evidence of asset ownership; and in the case of a foreign bank, certification by the home supervisory authority that it agrees with the proposed investment.
    - Changed focus of supervision activities from compliance-based and checklist-driven assessments of banks’ condition to a forward-looking and risk-based framework.
    - Improved rating methodologies. The CAMEL rating system revised, including to ensure that the composite rating will never be better than the bank’s individual factor rating for capital adequacy.
    - External auditors of banks required to report to the Bangko Sentral ng Pilipinas all matters that could adversely affect the financial condition of their clients, any serious irregularity that may jeopardize the interests of depositors and creditors, and any losses incurred that substantially reduce the bank’s capital.
  - Addressing recognition and resolution of weak banks
    - Intensified bank monitoring of selected banks.
    - Measures to improve the ability of PDIC to act as the receiver of banks, including selling assets of distressed banks to pay for the administration costs related to receivership, and faster approval by the Monetary Board of a proposed liquidation.
    - Prompt corrective action and explicit procedures for bank capital shortfalls.
  - Later measures
    - Memorandum of Agreement between the SEC and the Bangko Sentral ng Pilipinas (2001).
    - Anti-Money Laundering Act (2001).
- Thailand
  - Revamping of the prudential framework
    - Tightening of loan classification and loans had to be classified into five categories.
    - Strict rules on interest accrual were established.
    - Provisioning requirements gradually tightened to bring them in line with international best practice.
    - Rules for classification and provisioning of restructured loans to set clear incentives for banks and finance companies to actively initiate restructuring of nonperforming loans.
    - New regulation to requiring collateral for loans above a certain size to independently appraised.
  - Strategy to restructure and rehabilitate the financial system
    - Establish the Financial Sector Restructuring Agency to deal with suspended finance companies, replacing the Bank of Thailand and the ministry of finance temporarily as decision maker on all matters related to financial sector restructuring.
    - Amend the Commercial Banking Act and the Finance Company Act to empower the Bank of Thailand to request capital reductions, capital increases, or changes in management in troubled commercial banks and finance companies.
    - Establish an asset management company to deal with assets of the finance companies that had their operations suspended, or impaired assets in any financial institution in which the Financial Institutions Development Fund had acquired shares (intervened) and assumed management control.
    - Amend the Bank of Thailand Act to empower the Financial Institutions Development Fund to lend to these institutions with or without collateral, raise the fee charged to financial institutions whose depositors and creditors were protected, and make explicit the government’s financial support of the Bank of Thailand.
- Note:
  - */ Based on IMF Occasional Paper 188 Financial Sector Crisis and Restructuring: Lessons from Asia, and Financial Sector Stability Assessment reports for Financial Sector Assessment Programs undertaken in the countries.

### Appendix III: Initial conditions variables and samples
- Initial Condition Variables
  - Change in credit to GDP: Cumulative 5 year change in bank domestic credit to the private sector as percent of GDP, IFS and WEO.
  - Increase in bank NPLs to total loans: Percentage point increase over 5 years in the ratio of bank nonperforming loans to total loans, GFSR.
  - Credit to deposit ratio: Ratio of bank domestic private sector credit to resident customer deposits, IFS.
  - Banking system’s net foreign assets: Net foreign assets of banks to GDP, IFS.
  - Increase in bank capital to total assets: Percentage point increase over 5 years in the ratio of bank capital to assets.
  - Gross external debt: Gross external debt as percent of GDP, WEO. Data available only for emerging and developing economies.
  - Net external debt: Net external debt liabilities in the International Investment Position as percent of GDP, IFS and WEO.
  - Foreign reserves to short-term external debt: Level of foreign reserves to short-term external debt,IFS and WEO. Short-term external debt data are available only for emerging and developing economies.
  - Current account deficit: Current account deficit as percent of GDP, WEO.
  - Cumulative net non-direct investment flows: Net non-FDI capital account inflows during 5 years as percent of GDP, WEO.
- Samples
  - GFC: through end-2007
  - AFC: through end-1996
  - 2012: through end-2012 or latest

*Source: _wp1438 - Appendix Table 3. Asia: Stocks (IMF PDF content provided).*

### APPENDIX IV. RECENT FSAPS IN ASIA

### APPENDIX IV. RECENT FSAPS IN ASIA

### China
- Findings:
  - The 2011 FSAP noted that China had made remarkable progress in its transition toward a more commercially-oriented and financially sound system.
  - Improvements continue to be made to the structure, performance, transparency, and oversight of financial institutions and markets.
  - As a result, the financial sector entered the GFC from a position of relative strength.
  - Despite ongoing reform and financial strength, China confronts a steady buildup of financial sector vulnerabilities.
  - The main near-term domestic risks to the financial system were: (i) the impact of the recent sharp credit expansion on banks’ asset quality; (ii) the rise of off-balance sheet exposures and of lending outside of the formal banking sector; (iii) the relatively high level of real estate prices; and (iv) the increase in imbalances due to the current economic growth pattern.
- Key recommendations:
  - (i) advance the process of interest rate and exchange rate reform while ensuring that appropriate credit risk management practices in financial institutions are in place;
  - (ii) clearly delineate the roles and functioning of policy financial institutions from commercial financial institutions;
  - (iii) empower the PBC and three supervisory commissions with focused mandates, operational autonomy and flexibility, increased resources and skilled personnel, and strengthen interagency coordination to meet the challenges of a rapidly evolving financial sector;
  - (iv) develop a framework for regulation and supervision of financial holding companies, financial conglomerates, and informal financial firms;
  - (v) introduce a more forward-looking assessment of credit risk and eliminate deviations from the capital framework for credit and market risk;
  - (vi) establish a permanent committee of financial stability, with the PBC as its secretariat;
  - (vii) build a macro prudential framework for measurement and management of systemic risks;
  - (viii) introduce a deposit insurance scheme;
  - (ix) laws concerning the insolvency of financial institutions need to be reviewed and strengthened in all sectors.

### Australia
- Findings:
  - The 2012 FSAP Update concluded that Australia’s financial system is sound, resilient, and well managed.
  - The global outlook, however, remains uncertain and Australia faces long standing structural issues that will remain key sources of risk over the medium-term.
  - The financial system is dominated by four large banks that rely on foreign wholesale funding to finance residential mortgages, which are the banks’ single largest asset.
  - A combination of high household debt and elevated house prices increases the risk in this portfolio.
  - These risks are mitigated by the fact that the authorities have considerable policy space to respond to negative shocks given low public debt, a flexible exchange rate, some scope for monetary easing, and a well capitalized and supervised banking system.
- Key recommendations:
  - (i) develop a top down stress testing framework and publish top down stress test results in the Financial Stability Review;
  - (ii) devote more resources to stress testing;
  - (iii) introduce higher loss absorbency for systemic banks;
  - (iv) intensify on-site supervision of bank liquidity and upgrade daily liquidity reporting requirements to ensure consistency;
  - (v) re-evaluate the merits of ex-ante funding for the FCS with a view to converting it to an ex-ante funded scheme Treasury/CFR;
  - (vi) conduct frequent and focused crisis simulations and other forms of resolution testing;
  - (vii) continue recovery planning and introduce resolution planning.

### Japan
- Findings:
  - The 2012 FSAP Update concluded that important progress has been made since the 2003 FSAP assessment to strengthen and stabilize the financial system.
  - Significant restructuring was encouraged among large banks and insurance companies, nonperforming loans were reduced, capital positions improved, and supervision and oversight improved.
  - This progress and an effective policy response helped the Japanese financial system withstand one of the most severe output contractions experienced among the G-7 during the global financial crisis.
- Recommendations:
  - (i) close monitoring and contingency planning, especially with regard to risks related to the Japanese government bond market, sovereign funding pressures, regional bank vulnerabilities, and credit quality;
  - (ii) further advances in the regulatory and supervisory regime to better anticipate and manage systemic risks;
  - (iii) among all agencies, mechanisms for systemic and macroprudential oversight could be enhanced and more forward-looking cross-sectoral approaches should be adopted;
  - (iv) cross-border risk monitoring arrangements deepened given the growing activities of Japanese financial institutions overseas;
  - (v) broad-based financial reform plan could contribute to an enabling environment for private sector growth as the economy recovers and undergoes more ambitious fiscal consolidation.

### India
- Findings:
  - The 2012 FSAP found that India has made remarkable progress toward developing a stable financial system but confronts a build-up of financial sector vulnerabilities.
  - The main near-term risks to the financial system are a worsening of bank asset quality and renewed pressures on systemic liquidity.
  - The prominent role of the state in the financial sector contributes to a build-up of fiscal contingent liabilities and creates a risk of capital misallocation that may constrain economic growth.
- Recommendations:
  - (i) greater de jure independence of regulatory agencies;
  - (ii) consolidated supervision of financial conglomerates;
  - (iii) reductions in the large exposures and related-party lending limits in banks;
  - (iv) Enhance RBI monitoring of corporate indebtedness, refinancing risk, and foreign exchange exposures;
  - (v) improve the performance and financial strength of public financial institutions and subject them to full supervision and regulation;
  - (vi) strengthen oversight of banks’ overseas operations through Memoranda of Understanding;
  - (vii) strengthen coordination mechanisms among domestic supervisors through MOUs and formal frameworks;
  - (viii) gradual reduction in the statutory liquidity ratio;
  - (ix) strengthen resolution tools by granting stronger powers to supervisors to resolve nonviable entities in an orderly fashion;
  - (x) develop and periodically test arrangements to deal with a major disruption to the financial system.

### Indonesia
- Findings:
  - The 2010 FSAP noted that a decisive and successful response, as well as a decade of sound policies and structural reform, helped Indonesia recover quickly from the 2008 global crisis.
  - Lingering concerns over weak enforcement of the rule of law, transparency, and governance issues weigh on market perceptions.
  - The banking system was seen as generally healthy; while banks are vulnerable to credit, interest rate, and liquidity risks, a high capital and earnings buffer has provided a cushion against macroeconomic volatility.
- Recommendations:
  - (i) revised regulation to strengthen the quality of capital by bringing risk weights to at least Basel I levels and tightening the accounting definition of Tier 1 capital;
  - (ii) revised regulations to strengthen the regulatory definition of exposure and asset classification and provisioning norms;
  - (iii) Establish regular contacts with domestic and foreign supervisors to strengthen consolidated supervision and home-host cooperation;
  - (iv) Submit legislation for prompt corrective action to remove discretion from the process, and limit the time banks can spend under intensive supervision;
  - (v) strengthen stress testing capability;
  - (vi) review financial sector supervision and regulation to ensure micro-macro prudential coordination;
  - (vii) increase the deposit insurance fund commensurate with the increased size of deposits covered;
  - (viii) amend legislation to enhance the scope and strength of legal protection of bank supervisors and securities regulators.

### Malaysia
- Findings:
  - The 2013 FSAP main findings were that Malaysia's financial system has weathered the recent global financial crisis well, helped by limited reliance of financial intermediaries on cross-border funding, a well developed supervisory and regulatory regime, and a well capitalized banking system.
  - Stress tests suggest that banks are resilient to a range of economic and market shocks; though the high level of reliance on demand deposits is a potential vulnerability.
  - Other risks include rapid loan growth, rising house prices, and high household leverage, which call for enhanced monitoring of household leverage and a review of the effectiveness of the macroprudential measures.
- Recommendations:
  - (i) enhance monitoring of household sector leverage;
  - (ii) adopt multi-year top-down and bottom-up macroeconomic stress testing, and introduce more conservative credit loss parameters in bottom up exercise;
  - (iii) strengthen framework for consolidated supervision to address FHCs in such areas as consolidated capital standards and risk management expectations;
  - (iv) implement proposed new Financial Services Act and Islamic Financial Services Act at an early date; and strengthen legal and regulatory requirements for Islamic banks;
  - (v) strengthen the definition of connected lending;
  - (vi) Formalize a high-level committee with the responsibility for ongoing systemic risk monitoring, information sharing, and crisis action.

### Philippines
- Findings:
  - The 2010 FSAP Update found that the banking sector has been strengthened considerably since the Asian crisis of the late 1990s and today appears generally resilient to a broad range of macroeconomic risks.
  - Considerable progress has been made toward implementing the recommendations of the initial FSAP, particularly in banking supervision, but also in strengthening the bank resolution framework and nonbank supervision.
- Recommendations:
  - (i) establish a credit bureau with positive and negative credit information that includes the whole banking system and information about utility payments;
  - (ii) expand legal protection for all supervisory staff;
  - (iii) amend General banking law and New Central Banking Act to give power to the BSP (the Central Bank of the Philippines) to set prudential rules without changing laws;
  - (iv) Amend Prompt corrective action (PCA) regulation to make it more progressive and timely;
  - (v) involve Philippine Deposit Insurance Corporation early on in dealing with PCA failure bank;
  - (vi) allow conservator /receiver to take full control to restructure a bank without shareholder approval once capital adequacy breaches a regulatory threshold;
  - (vii) amend law for a bridge bank resolution mechanism.

### Thailand
- Findings:
  - The 2008 FSAP noted that the soundness of Thailand’s financial system had been strengthened since the financial crisis of the late 1990s.
  - Substantial progress has been made in upgrading the regulatory and supervisory system and improving macroeconomic management.
  - From simulated stress-test scenarios, Thailand banks remain vulnerable to a significant slowdown in domestic economic growth, with liquidity risk found to be material for a few banks.
  - These findings underscore the importance of continued close supervisory attention by the Bank of Thailand, in particular to weak banks in the system.
- Recommendations:
  - (i) passage of pending legal reforms to address weaknesses in the financial supervisory framework, including establishing legal independence of the heads of the supervisory agencies and provisions for objective and transparent standards for dismissal;
  - (ii) improve coordination among the supervisory agencies through regular consultations and greater sharing of drafts policies and regulations at the staff level. Improve process of consultations with market participants;
  - (iii) transition from a blanket guarantee to a limited deposit insurance system;
  - (iv) gradually reduce the government’s equity stakes in the private commercial banks;
  - (v) reduce the large stock of NPLs and distressed assets in the Thailand financial sector and state-owned asset management companies;
  - (vi) accurately identify and monitor the level and aging of NPLs in banks;
  - (vii) provide tax incentives for writing off NPLs.

*Source: APPENDIX IV. RECENT FSAPS IN ASIA (_wp1438).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp1438.pdf_