Furthermore, efforts to increase regional financial integration have come hand-in-hand with financial sector reforms and fostered regional cooperation, particularly in terms of crisis prevention and management. Regional surveillance through enhanced channels of communications and platforms of information sharing has been a main focus across different fora of economic ministers and central banks in Asia and the Pacific. The main regional crisis management tool, reserves pooling arrangement under the Chiang Mai Initiative, has been enlarged and its activation process has also been streamlined to better serve the needs of its members. Surely, Asian economies cannot decouple from the global economy as we still depend considerably on other economies outside the region. However, I believe that post Asian crisis regional integration and cooperation have helped most of our regional economies to stand by each other amid the turbulent environment. Ladies and Gentlemen, Although the regional economies have become increasingly more resilient and have focused on fostering effective regional crisis prevention and management mechanisms, we still need to be vigilant about the on-going risks. Moreover, there are important lessons from this crisis that we need to take into consideration in choosing the direction and pace of further economic integration in the new environment. First, while innovations and the removal of barriers to cross-border activity have expedited global capital market integration, they could also bring about complexities, less transparency, and therefore greater possibility and magnitude of systemic risks.

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.