Sophistication of financial products has led to inadequate understandings of market players as well as lack of transparency in certain securities markets and intermediaries. One notable example is the unregulated and non-standardized markets for structured products where a fair evaluation of the instruments as well as of the counterparty risk has been very difficult, not only for market players but also for supervisors. Second, the current financial crisis demonstrates the amplifier role of the financial sector in a boom-bust economic cycle. In the environment of fast credit expansion, rising capital inflows, and lack of proper regulation, the inherent procyclical nature of the financial sector has contributed to one of the unprecedented build-up of financial imbalances in the US during the boom and a disorderly unwinding of these imbalances during the bust. Third, the crisis also raises a crucial question about the role of monetary policy in maintaining macroeconomic and financial stability. The important question is whether monetary policy should be employed to help deter the build-up of asset price bubbles apart from the macroeconomic stability objective. And fourth, Asian financial markets have been more susceptible to negative events in the major financial markets. Volatilities in the regional financial markets have increased, driven increasingly more by actions of international investors. We have witnessed large capital reversals during the periods of risk aversion as their investment positions were unwound both in the stock and bond markets. Ladies and Gentlemen, These four important lessons will be important inputs for us while we cautiously proceed with further integration.

In doing so, first, let me start with the current financial crisis and its relation with global financial imbalances and economic integration. Then I will briefly discuss the stage of Asian economic integration and highlight the benefits it rendered in cushioning a number of regional economies from the adverse effects from the crisis. After that, I will draw the lessons from the current crisis that should further help gear our integration towards the path that reaps the most benefits and minimizes potential risks along the way. Ladies and Gentlemen, During 2004-2006, one of the main potential threats to the world economy centred around the global financial imbalances arising from the chronic and rising US current account and fiscal deficits. Although most economists believed that the situation was not sustainable, no one could predict the timing and extent of the unwinding process, nor whether the US would face a hard on soft landing. The current crisis, unfortunately, manifests an abrupt unwinding of the imbalances. The trigger point of the crisis is clearly the subprime lending problem in the US, a new phenomenon. However, most economists would agree that the root cause of the crisis lies beneath excessively accommodative monetary policy that led to excessive credits, and in turn, to asset price bubbles, a repeating cause of past crises. Other important driving factors behind rising credit expansion and bubbles included rising financial innovation and its complexity and lax supervision. The global financial imbalances could not have heightened rapidly since the early 2000s without fast rising global economic integration.