My comments reference the experience of East Asia, but reflect lessons that are more broadly applicable. Overview of recent recovery Given the depth of the problem a little more than two years ago, the Asian recovery on the whole is remarkable, and has largely defied initial expectations that the crisis would cast a long shadow over regional growth prospects. The regional recovery exhibits a solid “V” shaped trajectory supported by strong performance in the external accounts, but with more recent improvement in domestic demand. Banking sectors - faced with unprecedented crisis two years ago - have been shored up through substantial capital injections and problem asset carve-outs. Corporate sector conditions also appear to have improved notably with the advent of recovery and debt restructuring efforts. 1  BIS Review 57/2000  At the same time, authorities in a number of Asian countries initiated a wide range of fundamental enhancements to financial system infrastructure, including strengthening prudential regulation and supervision, bolstering bankruptcy and collateral recovery processes, and improving disclosure requirements. With the full implementation of these measures, standards in Asia will closely approximate international norms. Complacency In light of these achievements, there is much to be optimistic about. But we must all guard against complacency and reform fatigue, which represent a significant risk to sustained recovery. Crises entail wrenching change and costly solutions that are difficult to bear over a long period. The desire for a return to “normalcy” is strong.

•  Unbalanced financial systems create vulnerabilities. Financial systems that are unduly reliant on banks for financial intermediation are likely to be more vulnerable and slower to  3  BIS Review 57/2000  recover from the onset of weakness. Shallow capital markets limit lending alternatives and delay the recovery of financing to the real sector. The challenges can be daunting, but recent experience both within and beyond Asia confirms that a dedicated commitment to financial reform contributes to greater crisis-resilience and longer-term financial stability. While financial sector rehabilitation will remain a key priority for authorities in Asia, longer-term measures need to be put in place to deal adequately with the increasingly complex and dynamic international financial marketplace of the 21st century. The threats to financial stability are many, and no one set of measures can be expected to ensure against the recurrence of future problems. Financial intermediation is a constantly evolving activity, involving new risks, instruments and control challenges. Financial institutions and policymakers alike need continually to upgrade their processes to remain in command of these risks. To that end, it is imperative that new standards not be developed to “fight the last war”, but be sufficiently robust to meet new challenges in a dynamic way. Stability ultimately can be served only by the collective interaction of the three pillars of: •  sound leadership at the firm as well as at the national level;  •  effective market discipline; and  •  strong prudential regulation and supervision.