Exacerbating the downturn is the continued economic weakness in Japan, the second largest market in the region. Reflecting the weak external environment, export growth in many SEACEN economies has fallen sharply. This has also undermined domestic demand. Challenges for Asia Concerns over the slowing growth in the US and the much weaker Japanese economy have hit regional currencies. Since end-2000, regional currencies have seen higher volatility. While the greater flexibility of exchange rates has reduced the risk of large speculative attacks, such fluctuations are not without risk. The challenge facing policymakers is how to ensure the greater exchange rate flexibility does not lead to greater financial system fragility. Aside from macro-prudential risk, financial regulators also faced challenges arising from the rapid changes in the global financial landscape. In particular, advancement in technology, investors' demand for shareholder value and customers' demand for integrated financial supervision have accelerated consolidation and globalisation of financial institutions and markets. The boundaries of the banking, insurance and securities industries are less clearly defined. This calls for a more harmonised and integrated approach to supervision of the financial system. Besides co-ordinating among the different regulatory bodies to address unsupervised risks, overlaps and gaps in their regulatory framework, there may be a need to re-look the way national regulatory and supervisory authorities are organised, to create greater synergies and enhance efficiency. At the international level, efforts are underway to strengthen the architecture of the international financial system.

In particular, efforts have been taken to increase transparency, and develop and implement standards and codes to promote greater stability and enhance the robustness of financial systems to shocks. Efforts undertaken by international financial institutions include the IMF's Reports 1  The East Asian 9 economies are Indonesia, Malaysia, Thailand, the Philippines, Singapore, Korea, Chinese Taipei, Hong Kong and China. BIS Review 48/2001  1  on Standards and Codes (ROSCs), and the IMF/World Bank's Financial Sector Assessment Program (FSAP). Many developing countries, however, have expressed concerns over the tendency of these organisations to adopt a one-size-fits-all approach without taking into account the different circumstances and varying implementation capacity of the countries involved. In the banking industry, the Basle Capital Accord of 1988 was a landmark agreement which helped to increase the capital held by internationally active banks, and to create a more level playing field for banks under different jurisdictions. However, the rapid changes in banking and finance have led regulators to propose a New Basle Capital Accord which will establish a more risk sensitive and comprehensive capital framework, to benefit banks as well as improve safety and soundness of the financial system. The new Accord, however, poses challenges to Asian banks and regulators alike. The banks would have to develop more sophisticated risk management capability while the regulators would need to build up technical knowledge as well as supervisory resources to validate banks' risk management systems and determine if banks are sufficiently well capitalised on an on going basis.