engaging in risky or unproductive investments. to make things worse, both the banks and the corporates were taking excessive currency risks by borrowing in foreign currencies to fund projects that could only generate income in domestic currencies. poor risk management on the part of banks, ineffective banking supervision, political interference, and a critical lack of transparency prevented disciplinary mechanisms from functioning properly. the result is a staggering bank restructuring cost of an estimated 25 % of gdp for the crisis - hit economies in asia. the manila framework group is a forum comprising senior finance and central bank officials from 14 economies, namely, australia, brunei darussalam, canada, china, hong kong sar, indonesia, japan, korea, malaysia, new zealand, the philippines, singapore, thailand, the united states of america. senior representatives of the international monetary fund, the world bank, the bank for international settlements and the asian development bank also attend the meeting. the group meets twice a year. since the outbreak of the asian financial crisis, economies all over the region have taken important strategic steps to promote conditions that foster a full and speedy recovery. but recovery cannot be sustained unless it is accompanied by thorough structural reforms. it is encouraging to see that notable initiatives are taking place in asia where extensive programmes are in progress to restructure and recapitalise banks. there are also efforts to tackle the problems posed by over - stretched and highly indebted corporations. but there is a risk that the problems that were so evident then will be swept under the carpet in the face of rapid growth. it is crucial that the reform momentum should not be allowed to falter, as it could undermine the fledgling recovery. challenges of monitoring and surveillance of capital flows the second challenge i see is to understand better the risks posed by volatile capital flows and how to capture data to facilitate our understanding of such flows. for a long time it has been taken for granted that capital flows are analogous to trade flows : that, wherever they occur, and in whatever form, they invariably benefit long - term economic development, and that therefore the more liberal the flows, the greater the benefit. but between the processes of trade liberalisation and financial liberalisation there lies a great difference. in the case of trade liberalisation, there are well - established statistical systems to capture data on international trade, and hence their impact on the real economy. in addition, there has been parallel development of institutional framework and rules to deal with trade measures like tariffs, quotas,

this is eminently logical and sensible, since with more cautious bank lending and enhanced risk management within the hli sector, it should be very hard for the hlis to build up excessive leverage and concentration in the major financial markets. this measure is being pursued with earnest in both the public and private sector. the basel committee on banking supervision, and iosco have issued respective guidelines on sound practices for interactions with hlis for banks and securities firms. the latest discussion has focused on the kind of supervisory incentives for the compliance of risk management standards. the basel committee on banking supervision has put forward two proposals for the revision of the capital accord, which would help address the concerns on hlis. one is abolishing the maximum 50 % risk weighting for non - bank otc derivatives exposures ; and the other is encouraging counterparties to impose an initial margin on repo transactions. from the private sector, the counterparty risk management policy group formed by twelve leading international financial institutions produced a report in june 1999. five major hedge funds also produced an industry group report in february 2000 on improving counterparty risk management and internal control. while we agree that enhanced risk management of hlis and their counterparties is a useful first line of defence, two major concerns remain. first, the return of competitive pressure may lead to a relaxation or even a breakdown in risk management standards again in the future. there is anecdotal evidence that some large hlis are becoming less willing to supply information to their counterparties as memories of the ltcm saga are fading. it is thus important that regulators continue to promote the introduction of suitable supervisory incentives that would encourage continued compliance with sound risk management practices by the financial institutions. secondly, these proposals may not be sufficient to resolve the problem faced by smaller and open markets. even with reduced overall leverage, hlis could still build large foreign exchange positions relative to these markets. it might also be possible for hlis to build up potentially destabilising positions in smaller markets while remaining inside internal limits on leverage and / or liquidity risk. enhanced risk management cannot therefore be relied upon, in isolation, to alleviate the problem. a second proposal to enhance market stability is to improve transparency and disclosure to make markets work better. there have been two major international initiatives in this respect, one at the firm level and one at the market level. at the firm level, there is the multidisciplinary working group on enhanced disclosure, chaired by peter fisher of the federal reserve bank