This has been associated with the expansion of asset management: as at the end of 2015, the total assets under management of the top 100 asset managers exceeded $ At the same time, there has been a shift of capital flows away from advanced economies to emerging markets. Whereas these economies received less than 10% of cross border flows before the crisis, they have received 25% of those flows since 2009. The growth of market-based finance and asset management is creating new sources of funding, adding welcome diversity to the financial system, particularly for emerging markets. And in some ways these flows are less risky – for example the average maturity of international securities issued by emerging markets is 10 years, reducing rollover risk and exposure to a sudden flight of capital. But market-based flows have risks nonetheless. As Chart 6 shows, portfolio flows to emerging markets have been just as volatile as bank flows once their relative sizes have been taken into account. 14  And Hoggarth et  al (forthcoming) find that portfolio debt flows to emerging markets in particular are pro-cyclical, in that they rise when global volatility is low and reverse when global volatility increases, especially when denominated in foreign currencies. So as these gain in importance relative to bank flows emerging markets could have greater volatility inflicted on them by global factors. As well as the type of instrument, risk also depends on who is purchasing those instruments.

The first pillar: maintaining stability Distinguished guests, With an increasingly globalized economy and financial markets, the world is irreversibly and ever more interconnected. As a small member in the global community, we have no choice but to take this trend as given, and focus on fortifying the economy’s resilience against currents of uncertainties. The financial environment today continues to be shaped by the legacy of the global financial crisis. As the Federal Reserve continues to scale down its unconventional monetary policy and normalization of their policy rate looms, many emerging economies may experience sporadic fluctuations of capital flows and asset prices – be they in the bond, equity, or foreign exchange markets. So-called QE taper tantrum last year did  BIS central bankers’ speeches  1  prove disruptive for some members of the emerging markets club. That experience highlights the importance of maintaining sound macroeconomic fundamentals in order to foster the economy’s resilience against shocks of external kind. Despite higher global interconnectedness, investors do differentiate at the margin. Those countries with stronger macroeconomic stability both experienced less volatile capital outflows, and are less disrupted by them. This is not to say that financial market rationality can always be counted upon. Global fund flows may also be subject to fads, speculation, and short-termism. Left on its own, the resulting financial market volatility could prove damaging for overall macroeconomic stability. The policymakers have an important task of pre-empting such excessive and unjustified volatility. Thailand has had its fair share of volatile capital flow episodes in recent years.