Regional Financial Integration in East Asia against the Backdrop of Recent European Experiences

ABSTRACT

This article discusses recent trends in regional financial integration in East Asia and the current efforts of the Association of Southeast Asian Nations (ASEAN) member countries to foster regional financial integration against the backdrop of three decades of experience with financial integration in Europe. It reviews the two major crisis episodes of the recent European financial history to illustrate the risks associated with comprehensive capital account liberalisation and financial integration without commensurate supervisory structures. The article highlights the importance of targeted macroprudential policies and the development of an adequate region-wide regulatory and supervisory framework to reduce the risks associated with regional – and hence international – financial integration.

KEYWORDS:

• Regional financial integration
• East Asia
• financial stability

JEL CLASSIFICATIONS:

• E44
• F36

Acknowledgements

This article is a revised and updated version of a paper prepared for the conference on ‘Evolving Trade and Investment in Asia’ at the Lee Kuan Yew School of Public Policy in Singapore, 16–17 September 2015. This article builds on the author's earlier work in this area (Volz, 2013a, 2013b). Helpful comments by conference participants and especially my discussant Siu Fung Yiu are gratefully acknowledged.

Notes

1 The European Economic Area consists of the member countries of the European Union (previously European Community) as well as Iceland, Liechtenstein and Norway.

2 On capital market liberalisation see, for instance, NIESR (1997).

3 See, for instance, Buiter, Corsetti, and Pesenti (1998), Eichengreen and Wyplosz (1993) and Volz (2006).

4 The first second generation crisis model was developed by Obstfeld (1996).

5 The slow growth in Germany was partly related to entering the euro at an overvalued exchange rate.

6 For a recent survey of financial integration in Asia see Genberg (in press).

7 See also Avdjiev, McCauley, and Shin (2015).

8 Initiatives to foster bond market development include the ASEAN+3 Asian Bond Market Initiative and the Asian Bond Fund initiatives of the Executives’ Meeting of East Asia Pacific Central Banks (EMEAP). See Park (in press).

9 For a discussion of these provisions, see Volz (2013b).

10 These include, among others, the ASEAN Trading Link, which electronically connects exchanges in Malaysia, Singapore and Thailand; the ASEAN Disclosure Standards (which have been signed up to by Malaysia, Thailand and Singapore) to facilitate multi-jurisdictional offering of equity and debt; the ASEAN Corporate Governance Scorecard aiming to raise corporate governance standards and practices; and the ASEAN Bond Market Development Scorecard, which monitors the development of bond markets, cf. ASEAN (2015a).

11 ASEAN (2015a) provides an overview of the ‘achievements’ of ASEAN financial integration. See also Menon (2015).

12 This provision is also included in the original AEC Blueprint.

13 The study, which was launched on the sidelines of the Ninth ASEAN Central Bank Governors meeting in Brunei in April 2013, was endorsed by the ASEAN Central Bank Governors (2013) ‘as an important reference for ASEAN to further guide its financial integration process.’

14 The ABIF was endorsed by the ASEAN Central Bank Governors in December 2014. For the moment, QAB status will be granted through reciprocal bilateral agreements between two ASEAN central banks. These agreements will specify details of home-host regulatory and supervisory cooperation to ensure effective surveillance and supervision of QABs. Banks that have achieved QAB status will be allowed to operate in both countries involved (not in the entire ASEAN area) and will be granted the same operational flexibilities of domestic banks in the respective host country.

15 For an overview of macroprudential regulation and capital flow management measures in Asia see Chantapacdepong (in press).