awareness and the determination of the authorities concerned to make them happen. but notwithstanding the progress made, more can definitely be done to bring regional financial cooperation to a level that is on par with the region ’ s economic and financial potentials. this is to say that although the economies of east asia have recovered and are on the path of sustained growth, regional financial cooperation needs to continue and should substantially move forward. the rationale for this is clear : first, financial cooperation will lead to a faster pace and a more comprehensive development of the region ’ s financial markets. such development is crucial for sustaining the momentum of intra - regional trade and investment, a factor that has been instrumental for the region ’ s recent economic success. going forward, this momentum of intra regional trade and investment has a potential to become a major source of growth for the region, through the promotion the region ’ s domestic demand. second, with the globalized flows of finance and capital, maintaining financial markets stability is a key condition for preserving macroeconomic stability. to achieve this, in addition to the pursuance of sound economic and financial policies, the asian region also needs to have its own financial arrangement. such an arrangement will help ensure an orderly and stable financial environment such that any emerging vulnerabilities would not pose serious risks to the region ’ s financial markets and 1 / 3 economies. important in this context, i believe, is for the region to have its own financing facility that draws on the region ’ s own financial strength and resources. with such a facility, there would be greater confidence amongst policy makers in the region that we do have the capability and the capacity to look after our markets and economies if there were to be a major financial distress. on the basis of this rationale, it is my view that regional financial cooperation should move progressively forward, with the process being further strengthened and the work becoming more focused, aimed at producing more tangible results. let me now spare with you my thoughts on the way forward. on this issue, i should say at the outset that the points i am going to make here are not new, and some of them are probably already familiar to you. the first is the chiang mai initiative or cmi. cmi was created conceptually as a short - term financing facility to help participating members manage their balance of payments shortfalls at a time of financial distress. although the economies of east asia are now much stronger than five years ago, cmi should continue to remain a key pillar of

second, given that financial markets have become more integrated and more interconnected than ever before, the risk to economic and financial stability associated with capital inflows this time is also much greater. this is because large capital inflows relative to the absorptive capacity of any economy are more likely to be sustained for a longer period. as a result, the effects of abrupt reversals of capital inflows are likely to be more severe as well. such reversals, abrupt or not, are bound to happen once better growth prospects in the advanced economies are confirmed. the upshot is that we are living in a world where disruptive tail events can be more of a frequent occurrence than was the case in the past. and third, while the forces underlying the current cycle of capital flows are global, policy response in emerging economies remains domestic - centric. this, i think, is an important point to note in the current capital flows episode. also, because financial markets are more integrated, policy response in one country can have significant unintended consequences on other economies. in other words, we are living in a world where events and policies in a country can result in large spillover effects on other economies. so, this is the new economic and financial context in which the flows are taking place and the policy responses are being shaped. managing this will be a challenge, and effective policy response will require an integrated approach that combines flexible monetary and exchange regime, fiscal policy, capital account liberalization, and the use of macroprudential measures, in a coherent policy framework. moreover, the policy response will need to be supported by structural reforms and policies to enhance the depth, the resilience, and the strength of the domestic financial system, as well as policies to promote a greater degree of product and labour market flexibility. in this context, macroprudential measures constitute only one of the many policy tools that will have to be used. let me now turn specifically to macroprudential policies. one noted feature of the approach to deal with capital flows in the current cycle is the recognition that an effective and responsive prudential framework can help contain the build - up of financial risk and vulnerabilities that a boom in capital inflows typically generates. this includes the use of “ microprudential ” instruments to help keep individual banks strong, or to seek to contain system - wide risk through “ macroprudential ” measures. policy tools to serve both purposes are many