ASEAN has undertaken gradual and sequenced liberalisation of identified financial services sub-sectors through the ASEAN Framework Agreement on Services (AFAS). Five rounds of negotiations have been concluded, with the sixth round of negotiations expected to be concluded by next year. In the area of financial markets, an Implementation Plan for an Integrated Capital Market has been developed to enhance market access, linkages and liquidity. ASEAN has also made  2  BIS central bankers’ speeches  significant advancements in the areas of supporting financing for infrastructure development, as reflected by the establishment of the ASEAN Infrastructure Fund in 2011. Notwithstanding these developments, a crucial driver for greater financial integration within the core of ASEAN financial systems is the banking sector. ASEAN banks have a significant role in supporting the financial integration process. Over the recent decade, we have witnessed the rising prominence of ASEAN financial institutions within the region, driven by the growing business fundamentals in the region and the strengthened capacity of the financial institutions. ASEAN commercial banks are predominant mobilisers of financial funds, as our experience shows, the banking sector is the most matured component in the financial sector of most jurisdictions. The banking sector therefore serves as an important conduit to increase connectivity among all ASEAN nations and in fostering financial integration. Towards this end, the ASEAN central banks have endorsed the ASEAN Financial Integration Framework in 2011 and are in the final stages to launch the framework for banking sector integration.

Consistent with the more traditional banking models in this region, there are now increasing calls for a return to basic banking and its clear separation from higher risk-taking activities. This is part of the broader efforts to create a safer global financial system where markets and institutions are more transparent, less complex, and less leveraged than they are today. While the banking sector in ASEAN has not reached the degree of complexity observed in the advanced economies, the region has to be mindful of the consequences as financial institutions evolve to become increasingly regional in orientation. Indeed, such growth must be commensurate with the capacity and capability of both the financial institutions and the regulators to manage and oversee the associated risks. Strengthened supervisory intensity and effectiveness, a core component of the financial sector reforms, is an essential pillar to check against unfettered innovation and risk-taking behaviours and promote strong incentives for prudent risk management. ASEAN will have to pursue an outcome that facilitates innovation and efficiency, without resulting in undue risks and unwanted costs on both the financial system and the overall economy. Second, is the stronger focus on more responsible and sustainable financial business practices. Following the recent global financial crisis, there is a stronger international emphasis for appropriate risk-aligned mechanisms, particularly on compensation frameworks, which provide incentives for financial innovation and growth, while not compromising financial stability.