Lessons from the Asian crisis Five years have passed since the Asian financial crisis began, prompting a major re-think of policies held to be obvious and valid before the crisis. In particular, the crisis has highlighted three major issues in Asian economic and financial systems. First, some analysts have questioned East Asia’s growth model, with its emphasis on high savings, reliance on foreign investment, and export growth. East Asian economies, it is argued, should instead lower savings rates, in order to stimulate domestic demand, develop indigenous enterprise, and insulate themselves from volatile external conditions. Second, the crisis highlighted the dangers of liberalising capital markets too rapidly and without adequate safeguards. Before the crisis, capital account liberalization was the vogue. Conventional wisdom emphasized benefits rather than costs of free capital flows. The crisis demolished this complacent confidence. Undoubtedly, structural flaws and policy errors, especially in the financial and corporate sectors, contributed to the crisis. However, the financial markets’ reaction to these weaknesses was out of proportion to the severity of the crime. Markets proved highly susceptible to contagion and herd behaviour. Crashes and panics shook seemingly sound economies to their roots. Third, the crisis demonstrated the dangers of over-reliance on bank-based financing. In many Asian countries prior to the crisis, capital markets were underdeveloped. Bond markets, in particular, were illiquid or nonexistent. So Asian firms relied on bank loans for working capital and to fund capital expenditure. When banks ran into trouble, firms were left without alternative sources of capital.

This guideline is unlikely to stand in the way of market development, as the $ is not a currency commonly used for transactions abroad, and non-resident entities would in any case wish to swap or convert the $ proceeds into a currency of their choice for overseas use. With this liberalisation, the following will now be possible. a. First, MAS will exempt all individuals and non-financial entities, which includes corporate treasury centres, from the $ lending restrictions of the non-internationalisation policy. This recognises that such entities are not usually the prime drivers of destabilizing currency speculation. b. Second, for non-resident financial entities that continue to be governed by the $ policy, we will lift restrictions in the following financial activities: i. Asset swaps, cross-currency swaps and cross-currency repos can now be transacted freely. MAS had hitherto treated such transactions as forms of $ lending. It will no longer do so. ii. Securities Borrowing and Lending (SBL) – Financial institutions in Singapore may now lend any amount $ securities in exchange for both $ or foreign currencydenominated collateral. MAS will lift the requirement that any lending of $ securities exceeding $ million has to be fully collaterised by $ collateral. BIS Review 19/2002  3  iii. $ FX options – Financial institutions may also freely transact $ FX options with nonresident entities. FIs no longer need to maintain documentary proof showing that $ FX option transactions with non-resident entities are for hedging purposes. iv.