in the patterns of trade, production and growth in the coming years. the adjustments to these changes will be neither easy nor smooth. as unemployment in some advanced economies mount, the risk of trade and financial protectionism rises. rapid changes in the real economy will generate greater uncertainty, and potentially greater volatility in financial markets. over the next few years, asia is likely to grow more slowly compared to pre - crisis days, when external demand from advanced economies weakens. to sustain growth, asian economies with big domestic markets will need to continue with structural reforms to boost domestic demand. smaller asian economies will have to re - orientate their economies to respond to new opportunities in these markets. the cross - border production and supply - chain networks, which have been so efficient in raising asia ’ s exports to the rest of the world, remains valuable but will have to be increasingly re - orientated towards raising domestic and intraasian consumption of final goods and services. measures to encourage new investments in the corporate sector and in public infrastructure, as well as in education and healthcare, will be necessary for most asian emerging economies in order to realize their growth potential. the basic outline of changes is well understood, but crafting the details of these changes, and calibrating the pace of implementation, will need thoughtful work. the build up of domestic demand would probably be a gradual process, as experiences of japan and germany suggest that reducing a nation ’ s export dependence involves major structural changes that evolve over an extended period of time. nevertheless, i am optimistic that asia will be able to respond to these challenges, to achieve its longer term growth potential and contribute towards more sustainable global growth. financial regulations and development let me now turn to the third set of challenges : financial regulations and development. financial authorities are now working intensely in various fora, such as the financial stability board and basel committee, on regulatory reforms and cross - border cooperation. the major themes relate to new capital and liquidity frameworks and linking these to systemic risks ; dealing with the moral hazard problem of individual institutions becoming “ too big ”, or “ too connected ” to fail ; cross - border coordination and resolution regimes ; redefining accounting rules and building counter - cyclical buffers to address pro - cyclicality ; adherence to global standards and others. in many areas, measures have already been agreed and implemented. many of these changes will be relevant to asia, and we need to abide by global standards. however, following the asian crisis, significant

in most of the acceding countries. to give an example, more than 90 percent of czech banking assets are held by foreign owned banks. what might this development then imply? consider the following three areas : supervision, deposit guarantee systems and crisis management. supervision. there are good reasons for banks to expand through branches and so be able to slim down their own internal bureaucracy, and have a single point of contact with supervisors and a substantially reduced reporting burden. but would this be accepted by national authorities? home supervisors would become responsible for banks with in some cases a systemic presence in foreign markets. host supervisors would find themselves legally limited in supervising even systemically important institutions in their own domestic market. the traditional home - host principle simply does not work for systemically important branches. the fact that we have not yet seen much of cross - border branching indicates there are some “ invisible ” barriers. one of these barriers probably is scepticism from national supervisors. with a few exceptions banks still expand through subsidiaries, which is costly and makes synergies hard to realise, and thus hampers integration. can we find a way to secure financial stability without limiting the positive drive for further integration? deposit insurance guarantees. minimum standards are set by the eu, but in practice the national guarantee systems differ widely. notwithstanding the existence of limited deposit guarantee systems, for larger banks the government will probably have to pay up the main part in the case of problems, due to lack of funds. this might be politically acceptable as long as depositors are domestic residents. however, cross - border branching extends the government guarantee to deposits of foreign residents. would it be acceptable to use tax - payers money to refund foreign depositors at a larger scale? this might pose problems both for the home and host country. the wide divergence of national systems clearly needs attention. potential solutions might include increased co - operation and harmonisation regarding fees and entry and exit rules. crisis management. national central banks have national mandates in extending emergency liquidity assistance. in a future integrated european financial market, the mandate of the lender of last resort will not be as clear - cut. how should this function be organised when the largest banks might be systemically important in several eu member countries? there will also be banks that are very important in one country while being completely insignificant in a european context. another issue is whose interest a national supervisor will protect in a crisis involving a cross - border banking group strictly its own national interest ( the case now )