The increased connectivity of the world has been exemplified by the swift spread of financial and economic shocks throughout the global economy and international financial system in 2008, and the global supply chain disruption emanating from Japan in 2011. Despite these changes, institutional arrangements and governance for policy cooperation and coordination have yet to reach the levels that are commensurate with the degree of global economic and financial integration. While individual efforts by any single economy are  BIS central bankers’ speeches  1  vital to ensure that they do not become a source of instability to other parts of the world, they can no longer guarantee collective stability. Emerging economies that are more open and integrated with the global economy and international financial system are the most affected by these developments. The global financial crisis forcefully demonstrated the importance of the international dimension of policy. In the early stage of the crisis, the coordinated policy rate cuts, the enhancement of U.S. dollar liquidity facilities by several key central banks, and the unprecedented and concerted fiscal expansion effort turned the tide of the global recession. The establishment of the Financial Stability Board (FSB) in 2009, together with the Basel Committee of Banking Supervision, has also been at the centre of much of the work on global financial sector reform. While this represents a positive step, the efforts remain recent and modest in an environment where the underlying changes were built up over an extended period of time, and had already become entrenched and widespread.

2  BIS central bankers’ speeches  While foreign direct investment continues to gravitate to emerging economies, in particular to Asia, the scale of such investment activity has also moderated. Finally, the international regulatory reforms and the unilateral initiatives in a number of the major advanced economies have also had their intended and unintended consequences. The reforms, which have focused on building a stronger global regulatory framework and raising the resilience of the banking system, are still in their early stages of implementation. While it is too early to verify the concerns raised on the new prudential standards, the call has, however, been for the need to ensure that the benefits of greater systemic resilience will exceed any costs to the efficient functioning of the financial intermediation process and to the real economy. For Asia, the new standards contribute positively for regional financial integration, as they promote a more consistent regional approach to regulation. They also work to strengthen regional financial stability arrangements, through more robust frameworks for the oversight of systemically important financial institutions at the regional level. These reforms have, therefore, encouraged increased communication and closer coordination on financial stability developments between regulators in the Asian region. These financial reforms are, however, not without challenges for emerging economies. In particular, the standardised regulatory prescription goes against the grain of regulation that is proportionate to risk.