The main channels through which the crisis was transmitted internationally are now relatively well understood, although the extent and strength of the interconnectedness was quite surprising in real time. Activity corrected most in countries where credit was booming prior to the crisis, with large current account deficits, high external debt and highly leveraged financial sectors, in particular.1 In the euro area, a channel of particular importance was the fact that some banks had tapped US wholesale funding markets in large amounts to finance their activities.2 Some of these banks were in addition as heavily involved as US banks in the production of allegedly riskfree securities, such as asset-backed commercial paper, that aimed to meet the needs of US money markets funds.3 They were severely hit when these markets froze. Moreover, although the euro area’s current account was broadly balanced, it still had significant gross external assets and liabilities vis-à-vis the US, which acted as a powerful conduit of the crisis. Challenges became more intricate still when the third layer of the iceberg – the sovereign debt crisis – surfaced towards the end of 2009. Risk re-pricing intensified, spreading from banks to sovereigns and back to banks in an adverse feedback loop, and interacted with existing – but previously hidden – vulnerabilities in several euro area countries. This feedback loop included three separate ingredients. First, the solvency of some banks was strained by significant exposures to domestic sovereign debt and write-offs or declines in the market value of government bonds that eroded their capital.

These initiatives are significant not only for their tangible economic benefits, but also as symbolic demonstrations of the collective interest in regional financial cooperation. Alliances among Asian exchanges Another area with potential for regional financial collaboration is in the securities and futures exchanges market. In US and especially in Europe, a wave of consolidation among leading exchanges has resulted in mega-exchanges that have the economies of scale to make investments in advanced infrastructure, offer competitive fees, and most importantly provide investors and issuers with the liquidity that they seek. Exchanges in Asia have thus far been largely insulated from the trends of consolidation. Asian stock markets are generally smaller in size and less liquid than those in more developed countries. To remain relevant to international investors in this changing landscape, regional exchanges should deepen their collaboration with one another. The decision of the recent ASEAN Finance Ministers’ meeting to explore alliances and linkages among ASEAN securities markets will catalyse and encourage this collaboration. Regional exchanges are already taking the first steps. The Singapore Exchange, SGX, for instance, established a co-trading linkage with the Australian Stock Exchange in 2001. It is in discussions with Tokyo Stock Exchange on a possible alliance, and has recently started talks with Bursa Malaysia, formerly the Kuala Lumpur Stock Exchange, on possible collaborations. Pressing on with reforms at the national level While pursuing regional initiatives, individual countries need to press on with reforms at the national level.