This is followed by reversals arising from the deleveraging efforts to reduce public and private indebtedness. These volatile capital flows in the international financial markets have increased the volatility in exchange rates and asset markets. The low international interest rate environment has also been a factor that has increased the prospect for the financialisation of commodity markets. Finally, there is the impact of the potential unintended consequences of the global financial regulatory reforms. The effort to implement the new global regulatory reforms is already underway in Asia, with many jurisdictions making significant progress. These reforms are aimed to significantly enhance financial institutional soundness and safeguard financial stability. Concerns have, however, been raised on the unintended consequences that may  BIS central bankers’ speeches  1  arise in the emerging economies, including its potential ramifications on the real economy. This underscores the importance to implement these reforms cautiously, including the need to conduct impact and behavioural studies, and to consider how the national implementation of these global standards should reflect the respective domestic experiences and circumstances. Factors underlying the transformation of Asia Asia’s rapid growth trajectory over several decades has been underpinned by a number of fundamental characteristics. These same characteristics are still present and will continue to support the ongoing transformation that is currently taking place. More recently, distinct strategies have been implemented to strengthen further the macroeconomic fundamentals and financial system soundness in the region.

Now, five years into the global financial crisis, Asia is faced with an even more challenging and uncertain global environment, as significant spillovers originating from Europe and the United States are being felt by the region. Again, questions on the sustainability of the region’s economic growth prospects are being raised. My remarks today will focus on the new challenges that are confronting Asia, and whether its resilience built in this decade will now enable Asia to rise to these greater and more complex challenges. Challenges arising from global spillovers Given the degree of openness of most of the Asian economies, Asia is highly integrated with the global economy. While Asia benefited from this openness, it also resulted in the region being more vulnerable to global financial and economic developments. Many previous episodes of economic recession and crisis were triggered by external shocks, which at times exacerbated and amplified domestic vulnerabilities. These include the commodity price shocks in the 1970s and ‘80s, the large swings of destabilising capital flows in the 1990s, the bursting of the tech bubbles and the SARs epidemic in the early 2000s, and finally the global recession which saw an unprecedented decline in global trade. The ongoing global financial and economic crisis is resulting in turbulence in the international financial markets. In part, this is emanating from the global policy spillovers arising from the unprecedented monetary easing, which has resulted in surges of capital inflows in search of higher returns in a low interest rate environment.