Against this background, key concerns of Asian central banks focus on the global economic slowdown, tightened global liquidity, and potential capital outflow. Indeed, slower export growth to major advanced economies, and adverse changes in equity market wealth on real consumption, investment, and income will certainly affect export-dependent Asian economies. BIS Review 135/2008  1  As for financial market volatility going forward, some of the growth projections that came out of various sources, including the degree of volatility in asset and currency markets, would quite easily exceed even the most conservative stress-test scenario that most banks would have carried out six months ago. However, if the experience of Asian crisis is anything to go by, one should remain alert to the possibility of a long period of correction and adjustment. Moreover, given the global contagion, economies and markets with less structural resiliency, and lacking width and depth and thus liquidity, may eventually encounter dislocations in their real sectors. What does this combination of global slowdown and heightened market volatility mean for banks and financial regulators? Ladies and Gentlemen, In this scenario, credit risk management would be the priority for banks and regulators, to ensure that going forward, asset quality remains sound, and banks have adequate capital and provision to absorb this risk. Indeed, the underlying cause of the present global financial crisis is the lapse in credit culture and credit risk management, which has allowed excessive leveraging and indebtedness.

And, it should encompass key regulators and central banks, for information sharing and elimination of regulatory arbitrage, which has been one of the underlying causes of this crisis. While the crisis management may lead to rapid changes in regulatory framework, such as the much discussed mark-to-market rule, it is important to remember two things. First, investors would form their own opinion of valuation. Second, differences in such treatment could, if not carefully managed, cause regulatory arbitrage, moral hazard, deterioration in risk management culture, and difficulty in exit-policy. There is of course no simple rulebook on how to deal with a crisis. Each country has to take into account its own institutional context. But, the mantra of a good and sensible risk management, especially at its core principle level, should not be violated. Again, I cannot overemphasize that the internal risk management system of banks should match its risk profile, as deemed appropriate by the Board. Simply observing minimum regulatory standards or international standards may not be adequate. Should the nature of its underlying risk indicate otherwise, attempts to ignore it would likely be tested by markets, and with real consequences. For this reason, the key principle of Basel II makes a very good sense, and even more so with the dynamic changes in risk emerging from the current crisis. On the issue of cooperation, I am pleased to say that central banks and regulators of the Asia Pacific region have forged a very close cooperation over the years, under fora including ASEAN, EMEAP, SEACEN, and SEANZA.