encouraging the process of change in banks. while the prime responsibility for prudent management of banks does rest with the banks themselves, the authorities do have a role to play in ensuring that effective systems of supervision are in place. these should include incentives to discourage the excessive taking of risk by banks, including that owners should be required to have a significant amount of capital at risk and to bear the losses should a bank fail. the infrastructure of business laws, accounting rules and public disclosure requirements must also be conducive to prudent management and market transparency. payments systems must be enhanced to reduce the risk of systemic instability. 29. these are all areas where progress is being made throughout the region. i detect few signs of complacency among my fellow regulators or of a tendency to rest on past successes. we all recognize that banking stability is something that requires constant attention to keep up with changes in the economic environment and with market developments. there is also, i believe, a strong appreciation of the need to work together to promote stability. this is shown by the regional initiatives, through groupings such as emeap, to promote cooperation in supervision and in other financial sector issues. international institutions such as the asian development bank also have an important role to play in encouraging financial market development. i am sure that this forum will be helpful in addressing some of the issues involved, and i am grateful to the adb and the iif for organizing the event and for giving me the opportunity to speak.

loans. but within most of the banking systems of the region it is the local banks which predominate in terms of share of assets. the position of asian banks 10. so let us take a look at the current position of the asian banks. it is in fact very difficult to generalize because the banking systems in the region are not homogeneous. but certainly if we look at what the world bank has called the eight “ high performing asian countries ”, the asian banks have been at the heart of the asian success story2. this is partly due to the emphasis laid by governments on trying to ensure the stability of banks, through prudential supervision and other means, to encourage confidence among savers. while there have been periods of financial distress in individual banking systems in the region in past years, such incidents have generally been fewer and less severe than in other emerging markets. asian banks were able to meet the basle committee ’ s recommended 8 % minimum capital adequacy ratio with comparative ease. moreover, despite the fact that barriers to entry in some economies have protected the asian banks from the full forces of competition, they have managed to survive on lower interest margins and achieve a higher level of operating efficiency than their counterparts in other regions. 11. the asian banks have of course benefited from operating in the fastest growing region in the world, and one where the macroeconomic environment in terms of gdp growth, inflation and exchange rates has been much less volatile than in, say, latin america3. more recently, however, growth in some economies in the region has slowed. i hope that this will turn out to be a cyclical, rather than a structural, phenomenon. at any rate, the economic environment is currently somewhat less benign, and this has brought into sharper focus some of the challenges which banks in the region are now facing. the emerging asian bond market, world bank 1995. the east asian miracle, world bank 1993. bis annual report 1996. the challenges faced by asian banks 12. let me attempt to describe what these challenges are. there are obviously many, but i will focus on four main categories, namely : global integration of financial markets ; financial liberalization and increased competition ; maintenance of asset quality ; innovation and technological change. global integration of financial markets 13. the trend of global integration of financial markets is clear. the increase in capital flows into the emerging markets has been one of the dominant features of the 1990s. during the period 1990 - 95, inflows into the