Thus, regional financing and growing role of regional-centric financial services would naturally follow. The most critical challenge emerging Asia faces is to build economic and financial infrastructure fast enough to properly harness the growth energy and put these capital into productive use. Without adequate financial infrastructure, namely market and legal infrastructure, and financial literacy, there is potential risk that emerging Asia cannot absorb such flows. This could result in misallocation of resources, including asset bubbles and instability. In parallel, public investment in infrastructure projects, as well as social investments in education and healthcare, are keys for increased productivity and economic upgrade. The challenge lies in getting the right balance between growth and stability, in managing large and long-term financing, increasing public investment, while keeping financial discipline. These are complex issues on how to ensure efficient resource allocation. A key strategy is to enhance the role of the market mechanism of the financial sector in Asia to rise to the challenge, and to act as check-and-balance on public policy. In closing, we are at an important turning point where we face paradigm shift. This is one of the realignment of relationship between the market, regulators, and society. In crisis countries, the balance of the relationship between the financial industry and the society shifts because the cost of financial crisis is born by the society. In emerging Asia, public policy including financial regulation comes under pressure from social demand for financial access as well as consumer protection.

For example, if national central counterparty is not a viable and efficient model for a small economy, then the cost of hedging would increase with higher risk weight under Basel III. Meanwhile, if derivatives are cleared overseas, through regional or global central counterparties, we need to consider implication for cross-border supervisory coordination, financial stability, and development of local financial market and competition. On a related issue of Dodd-Frank Act, restriction on proprietary trading of US bank could impact the liquidity of US dollar markets abroad, as well as liquidity of foreign government bond markets which are the back-bone of their monetary policy operation. Another key issue going forward is the balance of authority between Home and Host regulators. There are concerns about the proposal of Financial Stability Board on cross-border resolution of Global Systemically Important Financial Institutions, or G-SIFIs. The concern is that some Host regulators may not be included by the Home regulator in the Crisis Management Group or resolution planning, even if the institution is systemically important in their jurisdictions. We are glad to see the FSB taking initiatives to identify potential problems. Now it is the time to work together on solutions in an inclusive manner. This is because the inclusiveness of the process assures acceptability and commitment, and reduces the uncertainty from unilateral action of individual countries. These international regulatory  2  BIS central bankers’ speeches  standards have no direct international enforcement power.