While these measures have merits in safeguarding financial stability, they could have complex and cross-border impact. Even on the monetary policy front, unconventional measures are becoming more conventional. Central banks in the major economies have increasingly used unconventional monetary easing. Though necessary to stabilize their economies at this juncture, these policies have side effects of large and volatile capital inflows into Asia. This further  BIS central bankers’ speeches  1  complicates safeguarding of financial stability in other countries including Asia, and could, in turn, trigger some countries to resort to macroprudential measures themselves. Thus, in terms of policy space, we are dealing with a new paradigm of expanded policy tools, with new transmission mechanism, and requiring their own policy framework and governance. So we need to recognize the need for crossborder coordination as well as flexibility in execution given emerging uncertainty. Turning to the more medium-term structural issues, major regulatory reforms especially Basel III, Financial Stability Board reforms, and Dodd-Frank Act are still a known-unknown. We do know that they are designed to redress weaknesses that caused the crisis by enhancing capital and liquidity, while addressing the problems of procyclicality, and too-big-to-fail of SIFIs. For this, their merits are well recognized. But these reforms will reshape the global financial landscape and raise cost of financial intermediation. They will also have implications for cross-border level playing field, regulatory arbitrage, and alter risk profile of banks.

Therefore, we need to recognize the unknown element, that is, we don’t know their full impact on the financial market and global economy. The latest review of the Financial Stability Board of potential unintended consequences of regulatory reforms pointed to these concerns. Emerging markets have raised some concerns about the Basel III capital and liquidity frameworks. These may have negative impact on domestic financial markets, increase banks’ cost, and thus reduce credit and financial market liquidity. In particular, the liquidity standard, which is not yet finalized, the calculation in the framework may not accurately reflect emerging market’s financial market, and the implementation could distort local financial market. There have also been concerns about the treatment of traditionally low-risk trade finance in leverage ratio which may impact growth and development. Emerging Asia is predominantly bank-based; thus, Basel III will affect its financial intermediation relatively more than in the West, just at the time when financial intermediation is critical to support economic development and integration. Some of these standards are still under discussion, and thus Asia-Pacific region already has a proactive regional strategy to help steer these regulatory reforms, such as through EMEAP forum, to reflect our economic and financial market context. With regard to the OTC derivatives reform which aims to move OTC derivatives trading on to exchanges and cleared through central counterparties. There are concerns regarding inconsistency of regulation between countries, infrastructure that is needed, and cost for users.