Given that the central bank is the lender of the last resort, the central bank is in the front line of actions to restore stability. Regardless of the institutional arrangements for the supervision function, – of whether it is based on an integrated model or a model that is organised along  BIS Review 155/2010  3  sectoral lines, effective coordination is vital to effectively safeguard financial stability. Established arrangement for coordination avoids a piecemeal approach by any individual agency in the system and ensures a comprehensive response to the crisis. Greater coordination across agencies also allows for prompt actions to be taken. Elements for crisis management have largely been put in place in several of the emerging economies in Asia. This has included a framework for rigorous surveillance for the early detection of risks and vulnerabilities, the range of policy instruments to address the build-up of risks, the governance and accountability framework as well as the coordination framework. Regardless of whether the supervisory responsibility resides at the central bank, the role of the central bank in surveillance for macro-economic management, and its direct contact with the financial markets in its money market and reserve management operations can be leveraged upon to support the financial stability mandate. This allows for a more comprehensive response in containing and managing the crisis. In Asia, as regional financial integration intensifies, there has been greater regional cooperation and collaboration. During the Asian financial crisis, the management of the crisis was by the individual economies.

While the efficient functioning of the financial system was vital for the economic recovery in Asia, more important was the comprehensive set of policies that produced the recovery. Within a year of the introduction of the pro-growth measures, most of the crisis affected economies experienced a strong recovery. More recently, the global financial crisis has seen several rounds of wide ranging direct market interventions to restore the smooth functioning of these markets. Described as actions taken in the most extraordinary and exceptional circumstances, it demonstrates that this phenomenon of severe market dislocations has the potential to occur even in the most developed of the financial systems. As these massive interventions continue, primarily in the public and private securities markets, the concern is on its potential consequences on other parts of the world, in particular, to the emerging world. In the now more interconnected and interdependent world, these actions are already creating significant shifts in capital flows. Important for the emerging world is the ability to intermediate such surges in capital flows and to manage the risks associated with such liquidity inflows and its potential to undermine the current recovery. A further element that has frequently been underestimated is the role of behaviour which has had a major influence on the dynamics of the financial markets. Extreme forms of such behaviour are evident in asset and foreign exchange markets. While the former is prone to boom and bust, the latter is prone to overshooting.