The deleveraging by banks was, in particular, felt in 2009, following the actions by banks in the United States to strengthen their capital positions, and more recently by banks in the Europe to meet the new capital adequacy requirements. In view of the challenging conditions for capital raising, this is being achieved, in part, by asset reduction, either by asset sales, in particular in performing economies, or the withdrawal of credit lines. These operations not only have implications on asset prices but on currency movements, as funds from the asset disposal are remitted back to the home country. The reversal of capital flows following such deleveraging is thus accompanied by a correction in asset prices and depreciation in the currencies. For emerging economies, the more developed and liberalised the financial markets, the more significant will be the impact of such activities, and the greater will be the amplitude of the volatility in the asset prices and currency movements. Global policy spillovers have also been transmitted to the real economy through trade and investment flows. The world economy, including emerging economies, benefitted immensely from the fiscal stimulus that supported the economic recovery. However, as the deterioration in fiscal sustainability became a concern, the effects of the pull-back in public expenditure on growth have contributed to slowing world trade and cross-border investment activity. Emerging economies, in particular in Asia, have seen the export sector slow significantly.

Accommodative macroeconomic policies were generally supported by policies and reforms to strengthen the financial system, to ensure that domestic demand was supported by the financial sector. With rising incomes, private consumption and investment activities have expanded significantly to become the major engine of growth in Asia. Cumulatively, the increase in domestic demand in the region has transformed Asia into becoming a huge consumer market. This has also prompted greater inter-regional trade which has become mutually reinforcing on growth in the region. From being export-led, domestic demand has now become an important source of growth. Asia is, therefore, now shifting from being global producers to becoming global consumers. The wide-ranging financial reforms in several emerging economies in Asia, have resulted in financial intermediaries with strong capital and liquidity buffers, and improved risk management and governance practices. This has allowed for the financial intermediation process to continue without disruption during the recent global financial crisis. The more comprehensive regulatory frameworks have also been complemented by enhanced  BIS central bankers’ speeches  3  surveillance arrangements and a relatively more intrusive supervisory oversight. Wideranging policy tools, including macro-prudential policies, have been relied upon to mitigate and manage the risks emanating from excesses and the build-up of imbalances in the financial system. The opportunity was also taken by most central banks in the region to normalise interest rates once recovery had commenced. Interest rates, while still remaining accommodative, were raised from their historical lows. Finally, with more developed financial markets, shocks were now more dispersed throughout the financial system.