requirements and hence, a competitive cost advantage, provides a strong incentive for banks especially in the developed countries to move towards the more advanced approach under basel ii. this could result in an uneven competition between the domestic and international foreign banks operating in the domestic financial system. capability gaps in the adoption of the more onerous approaches under basel ii may place domestic banks at a competitive disadvantage in such countries. these considerations have meant that for many emerging economies, the translation of the basel ii framework to suit the local environment needs to be approached carefully. the basel ii text provides a range of options which can be considered by national supervisors to rebalance the calibration of basel ii to reflect the local environment. it is also important that basel ii is implemented as part, and not in isolation of, the overall financial sector development programme. this has been malaysia's approach. the highly fragmented banking system and relatively weak risk management systems within the domestic financial institutions which prevailed in malaysia prior to the financial restructuring and reforms that were undertaken from 2001 would have rendered the implementation of basel ii extremely difficult, if not impossible to achieve without risking disruptions to the intermediation process. the financial reforms that were undertaken to strengthen the underpinnings of our banking system are therefore instrumental in facilitating the smooth transition to the adoption of basel ii in malaysia without adverse market outcomes. in the more recent period, the asian region as a whole has made significant strides towards strengthening market structures and institutional arrangements for financial stability. two developments deserve mention, in view of their important contributions towards mitigating some of the concerns surrounding basel ii for emerging economies. first, in the decade following the asian crisis, the emerging economies in asia have extensively developed their bond and equity markets. measured in terms of market capitalisation, east asia's equity markets have more than trebled since 1997. the bond markets in the east asian region have also seen significant growth during this period with significantly improved liquidity conditions in these markets. there is therefore now a more diversified structure in the financial system. second, within asia, the regional cooperative framework has been substantially strengthened to support financial sector development, surveillance, crisis management and capacity building. an important achievement within the emeap process has been the establishment of a monetary and financial stability committee, or mfsc, which is charged with the mandate of facilitating greater regional collaboration in preserving monetary and financial stability as well as in the development of regional financial markets. since its establishment, the mfsc has exceeded expectations in terms

economies vulnerable to shifts in capital flows. the impact of sudden stops were amplified, causing the currencies to devalue and the cost of servicing the external debt to escalate, leading to a vicious cycle of default and instability. capital flows to the region went from a usd93 billion inflow in 1996 to a usd12 billion outflow in 1997. as a consequence, growth of the economies in this region contracted between a range of 16 % and 10 %, a big contrast to the robust growth of 7 % in the period before 1998. since then, emerging asian economies have learnt their lesson. the reliance on external financing was reduced. sources of domestic financing were diversified through the development of the domestic bond market. regional bond markets have expanded significantly. the region has replaced foreign currency borrowings with local currencies and addressed the inherent weaknesses in currency mis - matches in funding. however, there are unintended repercussions. an open and well - developed bond market attracts non - resident participation and the diversity of market players is said to enhance market liquidity. however, we have discovered that beyond a certain threshold the presence of non - residents participation is a source of instability. the higher the participation of non - residents in the bond market, the more vulnerable the market is to volatile portfolio outflows. so it is said that with history, if we learn it well, will not repeat itself. nevertheless, sometimes lessons in history are cloaked in apparent success. the 2008 global financial crisis and corresponding policy responses by major central banks caused risks not seen before. in the periods after, unconventional monetary policy and a prolonged period of low interest rates had negative spillovers to emerging markets. this was notably evident through the waves of volatile capital flows in large magnitude. these flows were drawn by the search for yields, and ironically coincided with a significant expansion and development of our financial markets, a key reform measure following the afc. the region was once again at the mercy of global easy money, flattered with an overvaluation of asset prices and domestic financial market exuberance. as these capital inflows mainly originated from the advanced economies, regional financial markets became increasingly exposed to their vagaries. take the taper tantrum for example, which exemplifies how fragile the region ’ s fate is when just a hint of the us fed possibly tapering its asset purchases was sufficient to trigger massive 2 / 5 bis central bankers'speeches capital outflows from the