improvement. set in this light, the immediate implications for asian banks from the challenges that i have outlined earlier may initially be the deterioration in the quality of their loan portfolios, including potentially higher non - performing loans. but over time, in response to structural changes undertaken by other economic sectors as well as increasing disintermediation and competition from both domestic and foreign players, we should observe stronger and more competitive banks in emerging markets. this transformed well - supervised, prudent and enterprising banking sector will remain crucial to the dynamism of asia. ladies and gentlemen, extraordinary emerging market income and consumption volatility may be the result of macroeconomic shocks, their propagation mechanism as well as policy and institutional setup, but it can be ameliorated by better risk sharing with the world. in this welfareenhancing endeavor, international financial integration on top of ongoing trade integration can play an important role. to end my talk today, let me share with you briefly the approach taken by thailand. the bank of thailand has sought a balanced approach to managing capital flows under flexible exchange rate. we also undertake concomitant reforms in the area of financial system and market development. these initiatives are closely related and progress in one requires progress in the others. in building a resilient economy, prudent fiscal and monetary policy does help. as an automatic stabilizer, flexible exchange rate also helps. but, prudent macroeconomic management alone will not raise people ’ s living standard in the long run. we need a balance between prudence and enterprise or the ability to take risky action and make sound decisions on the part of the business sector. otherwise, we risk either having a stagnant, inefficient economy or building a fast - growing one on a bubble ; neither of which we can afford. hence, the priority is the need to design a system that allows for constant self - correction – one that also lets the economy regain its strength quickly after a severe negative shock. that system should be underpinned by a strong link to the world economy, which will encourage innovation and efficiency. the competitive markets should operate under a clear rule of law with good governance. in support of them, we need an effective and honest government and supporting institutions that focus on improving resiliency of the economy and sustainable long - term economic growth. ladies and gentlemen, advanced economies do have economic, if not also strategic, interests in the success of asian emerging markets. an

as well as regionally. across the region, policymakers are sharing knowledge and expertise to ensure efficiency and pragmatism in the implementation of policy. most obviously, asian countries have also built up international reserves to a multiple of short - term external debt or other traditional measures of potential claims on reserves. they have also relied less on foreign debt financing and shifted more toward equity securities and direct investment. 4 this shift in the pattern of capital flows demonstrates to some extent advances in equity market development and corporate governance in the region. for a few countries, reserve accumulation partly constitutes a deterrent to the repeat of the last extreme episode of instability in 1997. as an added benefit, a relatively well - developed system of prudential banking regulation has also helped these countries avoid speculative pressures on their exchange rates. as far as financial integration is concerned, there have been selective and timely capital account restrictions and liberalization on both inflows and outflows over the years. much of this caution derives from the bitter lessons from the 1990s. but, even so, it is worth mentioning that, measured by total foreign assets and liabilities as a percentage of gdp, the trend from bangkok to seoul is that of more financial integration over the past 20 years. 5 ladies and gentlemen, these changes in policies and risk awareness make it less likely that financial market disturbances will trigger a sharp and broad - based dent to real economic outcomes. but, it may be a slight overstatement to declare that asia as a whole has become resilient to shocks and disturbances today. in a sense, the impressive heights of asian international reserves may be construed less as an indication of fundamental strength than as an indication for needed progress toward modern monetary policy framework. in addition to that, the size of accumulated global financial vulnerabilities that may unwind in the near future is by most measures unprecedented ; the extent and the whereabouts of the risk concentration are unclear. and as a result, circumstances of greater macroeconomic adversity may yet again put to test emerging markets ’ ability to adjust. the pressing and practical challenges emerging asia faces in the near term are three - fold. indeed, the three challenges are inter - related. they are “ hot money ” inflows and large inflows in general, pressure for rapid domestic currency appreciation, and finally, the potential loss of monetary autonomy in the sense of independent interest rate policy. having done the right thing over the past 10 years, asian emerging markets have become darling