In my view, Asia stands at an important policy crossroads, involving a choice between pushing forward market-based reforms that are the only way toward long-term financial stability, or pursuing actions that provide short-term relief at the risk of threatening the hard-won gains of the last three years. The recognition that we have entered a new international financial environment has set in motion a range of efforts dedicated to strengthening the new international financial architecture. My remarks today will focus on what I believe can be done, from my perspective, to enhance domestic financial resiliency, within the context of these international efforts, and particularly on two essential building blocks: a strong financial system and a sound and stable macroeconomic environment. My comments reference the experience of East Asia, but reflect lessons that are more broadly applicable. Overview of recent recovery Given the depth of the problem a little more than three years ago, the Asian recovery on the whole has been remarkable, and has largely defied initial expectations that the crisis would cast a long shadow over regional growth prospects. The regional recovery has exhibited a solid "V" shaped trajectory supported by strong performance in the external accounts, and a pickup in domestic demand. Banking sectors – faced with unprecedented crisis three years ago – have been shored up through substantial capital injections and problem asset carve-outs. Corporate sector conditions also appear to have improved notably with the advent of recovery and debt restructuring efforts.

This is confirmed by the fact that since midOctober 2010, when the idea of private sector involvement in programmes to assist countries experiencing difficulties was voiced at the highest political level, and in spite of subsequent clarification that in fact no change had occurred in prevailing practices, some euro area market segments have severely suffered. The benefits of a deep and liquid financial market where international investors feel safe to invest have been jeopardised, undermining the competitiveness of the euro. The alternative is for policy-makers to take responsibility and strengthen the economic governance framework of the euro area, in at least three ways. First, the governance framework underlying budgetary policy requires bold changes, with greater automaticity and stronger commitment on the part of policy-makers to ensure full compliance with the Stability and Growth Pact.3  3  4  The ECB published a long article on its views in this regard in the March 2011 issue of the Monthly Bulletin. BIS central bankers’ speeches  Second, further progress should be achieved in the implementation of the single market, strengthening the “economic leg” of EMU. Finally, we need to further integrate regulatory and supervisory institutions for the financial sector at the European level, either by reinforcing efforts to harmonise practices across Member States, or by further strengthening European authorities. A great deal has been achieved over the past few months, but much remains to be done to put the Union in a position to meet the challenges which have emerged as a result of the crisis.