Global Financial Turmoil: Impact and Challenges for Asia's Financial Systems

This paper examines the unfolding of the US subprime-generated turmoil and its potential spillover on emerging Asia's financial systems. The subprime mortgage mess has revealed key structural weaknesses in the evolution of modern credit markets. While emerging Asian financial markets have thus far suffered only limited impact, they remain open to further contagion given underlying weaknesses in the region's financial systems. Rapid financial globalization also poses new challenges as the region's largely unsophisticated banking and financial systems strive to keep up with the evolving financial environment and innovation. Policy priorities to foster regional financial stability include enhancing transparency and governance, improving risk management, strengthening regulation and supervision, and deepening and broadening financial systems, especially by developing local currency bond markets.