The next step inevitably is the correction to the real economy, interest rates and/or the exchange rate, that can sharply worsen asset quality and expose the accumulated weaknesses in the financial system. Role of central banks in promoting stability and growth A central bank’s most important role in achieving stable, long-term growth involves promoting price stability. Achieving long-run price stability is a difficult and continuous challenge, as it requires constant efforts first to detect, and then to correct the building up of internal and external imbalances. Moreover, because of time lags in policy effectiveness, authorities often have to take action based only on partial evidence, well before adverse symptoms are fully evident. The principal reward for forward-looking policy is that changes in policy, and the associated stresses they engender, are generally smaller and more easily assimilated by markets. The effectiveness of monetary policy naturally brings us to the question of monetary and exchange rate regimes. A great deal has been said in various forums about the choice of monetary and exchange rate regimes. I believe it is crucial that there be consistency between a country’s choice of currency regime and its other policies. There is no "right" regime that applies to all cases and all points in time. Experience has shown that no currency arrangement can compensate indefinitely for imperfections elsewhere in an economy, such as weaknesses in financial supervision, an excessively loose fiscal stance, or inflexible wages and prices.

Unfinished business While important progress has been made in rehabilitating Asia’s financial systems, a great deal remains to be done to continue the strengthening of weakened financial and corporate sectors, and improve the region’s resistance to future problems. I am well aware that universal policy prescriptions are difficult to draw, given the wide range of experience and initial conditions. Indeed, individual countries in Asia have followed differing reform strategies, and the results of these efforts will help to inform the ongoing debate. Nonetheless, I am fond of citing a few of the cautionary lessons from recent international experience with financial sector reform: •  Restructuring and reform must adequately address both the current "stock" of problem assets, as well as the potential "flow" of new problems attributable to deficiencies in the broader financial system infrastructure. Lack of adequate action on either front can lead to a continuation of the substantial costs of weak banking sectors, sometimes well beyond the immediate crisis itself. •  Clean-up efforts must be sufficient to the task. Half-done measures that leave financial institutions with significant levels of impaired assets at best postpone the reckoning and potentially create incentives for excessive risk-taking. •  Fundamental improvements in bank corporate governance are critical. Just as risk management and internal control processes usually need to be thoroughly overhauled in weak institutions, more often than not, so too does management. •  Protracted forbearance to preserve the appearance of solvency is not a solution.