The most critical challenge emerging Asia faces is to build economic and financial infrastructure fast enough to properly harness the growth energy and put these capital into productive use. Without adequate financial infrastructure, namely market and legal infrastructure, and financial literacy, there is potential risk that emerging Asia cannot absorb such flows. This could result in misallocation of resources, including asset bubbles and instability. In parallel, public investment in infrastructure projects, as well as social investments in education and healthcare, are keys for increased productivity and economic upgrade. The challenge lies in getting the right balance between growth and stability, in managing large and long-term financing, increasing public investment, while keeping financial discipline. These are complex issues on how to ensure efficient resource allocation. A key strategy is to enhance the role of the market mechanism of the financial sector in Asia to rise to the challenge, and to act as check-and-balance on public policy. In closing, we are at an important turning point where we face paradigm shift. This is one of the realignment of relationship between the market, regulators, and society. In crisis countries, the balance of the relationship between the financial industry and the society shifts because the cost of financial crisis is born by the society. In emerging Asia, public policy including financial regulation comes under pressure from social demand for financial access as well as consumer protection. These naturally accompany the take-off in growth as a result of economic and financial liberalization.

While these measures have merits in safeguarding financial stability, they could have complex and cross-border impact. Even on the monetary policy front, unconventional measures are becoming more conventional. Central banks in the major economies have increasingly used unconventional monetary easing. Though necessary to stabilize their economies at this juncture, these policies have side effects of large and volatile capital inflows into Asia. This further  BIS central bankers’ speeches  1  complicates safeguarding of financial stability in other countries including Asia, and could, in turn, trigger some countries to resort to macroprudential measures themselves. Thus, in terms of policy space, we are dealing with a new paradigm of expanded policy tools, with new transmission mechanism, and requiring their own policy framework and governance. So we need to recognize the need for crossborder coordination as well as flexibility in execution given emerging uncertainty. Turning to the more medium-term structural issues, major regulatory reforms especially Basel III, Financial Stability Board reforms, and Dodd-Frank Act are still a known-unknown. We do know that they are designed to redress weaknesses that caused the crisis by enhancing capital and liquidity, while addressing the problems of procyclicality, and too-big-to-fail of SIFIs. For this, their merits are well recognized. But these reforms will reshape the global financial landscape and raise cost of financial intermediation. They will also have implications for cross-border level playing field, regulatory arbitrage, and alter risk profile of banks.