After rising initially with the substantial costs associated with bank recapitalization programs, in recent years public debt ratios have generally been declining as a share of GDP. Monetary policy regimes have become more mature, with some progress toward greater de facto independence for central banks, with clearer mandates for price stability. Exchange rate regimes in the crisis countries have become somewhat more flexible, providing greater scope for monetary policy to sustain the domestic conditions for price stability. Financial systems are substantially stronger. Bank capital ratios now provide a significantly larger cushion against potential losses – though capital ratios in Asian banking sectors are still generally lower than those in other emerging economies. The quality of bank assets has improved. Nonperforming loans, estimated to have peaked at between one-quarter and three-quarters of total loans in the crisis countries, are now under 10 percent of total loans. Financial institutions that required government intervention have largely been restored to private ownership. Domestic capital markets  2  BIS Review 65/2007  are an increasingly important channel of intermediation in financial systems that had historically been dominated by banks. These are impressive achievements by any measure. And the changes that have taken place provide a strong foundation for future growth and they make it much less likely that these economies will be vulnerable to the type of crises of a decade ago. This progress is reflected in a broad range of financial market indicators of risk. Risk premia in domestic interest rates markets are low.

Exchange rate commitments provided less stability than had been assumed. The rise in capital mobility increased exposure to shifts in sentiment. Markets could now adjust much faster than policy could typically react. These judgments precipitated major changes in policies and a sustained investment in improvements to the institutional framework of domestic financial systems across the region. And these changes in turn laid the foundation for recovery and for the very substantial improvements in economic and financial strength now evident across the region. Achievements since the crises Although it took some time for policy to begin to restore confidence, recovery was stronger and more rapid than had been typical in other emerging market financial crises. Barely 18 months after the crisis, for example, Korean GDP had returned to pre-crisis levels, and this was true for all the Asian crisis countries by 2003. Growth has been relatively strong and stable since, though at a pace somewhat below the unsustainable rates of the decade prior to the crises. The balance sheets of the region have been transformed from weakness into strength. Current account balances are generally in surplus. External debt of the banking and corporate sector has fallen. Banking systems are now much less exposed to liabilities in foreign currencies; and the currency mismatches that made economies so vulnerable as the crises erupted have been greatly reduced. Official reserves have risen to levels without precedent in modern financial history. Fiscal positions have strengthened.