The recent global financial meltdown was a revelation in one sense. Before the crisis there had been a belief that banks could never fail, a belief that encouraged overleveraging and excessive risk taking. The complexity of financial instruments, opaqueness of transactions, and sophistication of modeling techniques used by developed country financial institutions all combined to conceal the hollowness of their success. Many financial institutions largely ignored regulatory requirements or preempted them through the use of complex instruments and methods, while risk taking caused profits to rocket to unimaginable levels. Regulatory arbitrage became rampant in this environment. While financial institutions were in a mode of overexpansion, regulators visibly failed to enforce regulations, and the financial institutions took advantage of the regulatory anarchy. All this was an eye-opener for regulators in South Asia, as regulatory lapses and lack of enforcement can lead to potential instability in financial systems. The report evaluates key prudential guidelines issued by the regulatory authority of each country to assess the comparability of data as well as to shed light on the country's level of regulatory development. It also expands the group of benchmark economies to allow comparison with diverse economies in Asia as well as the Western hemisphere. And it includes a special write-up on how South Asian countries and commercial banking sectors are managing the impact of the global financial crisis and economic slowdown.
