This led Asian firms to rely on short-term bank financing to fund longer-term projects, thus exposing themselves to maturity mismatches. Further, when the banks got into trouble, the firms were left with no alternative avenues to raise working capital. Thin capital markets accentuated price movements when investor preferences shifted. As a result, the economies’ ability to absorb shocks was severely impaired. So across the region, steps are now being taken to develop capital markets. Fourthly, there is now greater recognition that effective prudential oversight and corporate governance are critical to maintaining a sound financial system. Many Asian countries fell short in these areas, and are now striving to remedy the weaknesses. They need to establish rigorous supervisory regimes, foster a sound credit culture in banks, and apply international standards of accounting, disclosure, and loan classification. In this respect, the Basel-based committees, BIS, OECD, and other standard setting bodies have done valuable work, promulgating standards on banking supervision, risk management, corporate governance and public disclosure. Few would claim that these standards are Western cultural impositions, and that Asian banks and companies need different norms more suited to their societies and stage of development. Fifthly, there have been stronger calls to improve the workings of the international financial system, rather than adopt a hands-off approach. No plausible alternative to the existing market-based system has emerged. But the consensus view is that the robustness of the system can be improved, in particular through better monitoring, and greater transparency among market participants. This is work in progress.

But it stressed the virtue of market discipline more than the possibility of market failure. Financial crises were the fault of inappropriate policies. The remedy was more liberalisation, deregulation and privatisation. Markets would work, if only they had access to timely and accurate information. So the emphasis was on policy transparency and data disclosure, to enable the private sector to make “correct” decisions. So steadfast was the faith in open capital markets that, as late as September 1997, after Thailand had run into trouble, the IMF and G7 countries were still lobbying member states to 1  BIS Review 76/2000  amend the IMF’s Articles of Agreement to give the Fund the mandate to promote capital account liberalisation. Crisis shock Given this worldview, the Asian crisis came as a tremendous shock. Financial markets proved highly susceptible to contagion and herd behaviour. Problems in one country triggered a loss of confidence in its neighbours. Manias, panics and crashes occurred on a titanic scale, shaking seemingly sound economies to their roots. Structural flaws in the Asian economies undoubtedly contributed to the crisis. So did policy errors by governments and international institutions in responding to the problems when they emerged. The most serious flaws were in the financial and corporate sectors. Balance sheets were weakened by currency and maturity mismatches. Banks were lax in their credit practices. They borrowed short-term from abroad and lent long-term at home, often to related companies without proper assessment.