International and Regional Financial Architectures In addition to currency undervaluation, reforming international

7. International and Regional Financial Architectures In addition to currency undervaluation, reforming international

and regional monetary systems are also crucial for rebalancing economic growth. Regaining trust and confidence in the IMF as an international institution to provide financial assistance to its member countries in need will reduce the need for building individual reserves. he recent crises in East and Central Europe and Greece indicate that the world needs regional financial institutions to augment the IMF financing, surveillance and conditionality.

he London Summit of G-20 in April 2009 gave a renewed mandate and greater financial resources to the IMF and agreed to reform international financial architecture. hese allowed the IMF to rebuild trust by overhauling its lending framework by modifying its policy recommendation and conditionality and making them more flexible and can be tailored to the needs of individual borrowers. he IMF now supports countercyclical policies and even temporary imposition of capital controls to deter currency speculators. During his visit to Seoul in July 2010, Mr. Strauss-Kahn, publicly acknowledged the IMF’s policy mistakes in handling the Asian financial crisis in 1997. he reform will raise the IMF quota and voting power of Asia in the Fund and reduce the representation of the European on the Executive Board.

he increasing Asia’s voice and representation in the Bretton Woods financial organizations as well as the changes in its policy prescriptions are expected to have greater placement of large reserves of Asia countries he increasing Asia’s voice and representation in the Bretton Woods financial organizations as well as the changes in its policy prescriptions are expected to have greater placement of large reserves of Asia countries

As shown by experiences of ASEAN+3 countries during the recent crisis in 2008, the availability of the currency swap facilities from Chiang Mai Initiative (CMI) and neighboring countries have substantially added to foreign reserves to cover short-term foreign currency debt, provide a fiscal space and increase the scope for accommodating monetary policy. At that time, South Korea received currency swap facility from Japan and the PRC as well as the US Federal Reserve Bank. he establishment of

a European Financial Stabilization Facility (EFSF) in Eurozone in May this year following the crises in East, Central and Southern Europe also indicates the need for regional financial arrangements to supplement the IMF resources and surveillance.

he need for individual reserves in this region will be further reduced by the strategic decisions on the CMI made by the finance ministers of the ASEAN+3 countries during their meetings in Madrid in 2008. hey agreed to multilateralize BSA (Bilateral Swap Arrangements), to enlarge the size of the currency swap facility and to increase the portion that is non-linked to an IMF program. Chiang Mai Initiative Multi-lateralization (CMIM) is a great leap forward toward greater political cohesion in the ASEAN+3 countries as they transfer some national powers to a regional institution. Established in March 2010, the CMIM is a common swap arrangement of $120 billion. To do surveillance the ASEAN+3 Macroeconomic Research Office (AMRO) will be established in May 2011 replacing the ASEAN+3 Economic Policy Review and Policy Dialogue. CMIM will result in the pooled fund becoming self-managed under a single contract, thus reducing costly bilateral transactions and wasteful duplication of loan contracts.

he PRC is now very keen to support establishment of the quota-based

CMIM to pool resources through tapping of the region’s huge external reserves for supplementing IMF facilities. During the Annual Meetings of the IMF and the World Bank in Hong Kong, in 1997, the PRC along with the US and EU strongly opposed Japanese proposal to establish the Asian Monetary Fund. he PRC at present sees the MCMI as a platform for internationalization of RMB. Aside from establishing currency swap lines with its trading partners, the RMB are now being used as invoicing and trade settlements with its regional neighbors. Malaysia’s central bank has recently bought renminbi-denominated bonds for its external reserves (Financial Times, September 20, 2010).

Moving forward, the ASEAN+3 countries also need to strengthen regional cooperation to build up their financial systems and contribute to Basel III negotiations. he first area of cooperation would be to continue the existing regional programs to develop the bond and capital markets.

he existence of more matured national and regional bond markets allows ASEAN+3 to tap financial resources of their regional neighbors. he second area would be to reorganize and enlarge the SEANZA 5 forum by establishing

a college of regional bank supervisors to discuss common interests. All of ASEAN+3 countries are in transition from state-led financial repressions to market based system. he agenda would cover comparing notes and harmonizing bank resolution and insolvency procedures, the transition to a market-based system, corporate governance, how to corporatize and privatize public sector banks, how to deal with related lending of private banks, and the application of the risk-based Basel III regulatory and supervisory framework to all banks regardless of ownership. Narrow banks can be established with a special mission to administer government directed lending programs. T

he third area of cooperation would be to discuss and adopt a common stance on the harmonization of capital rules and supervisory practices in the region, and to anticipate the implications of the recent discussions

5 Established in 1956, SEANZA (South East Asia, New Zealand and Australia Central Banks) has two subsidiaries, namely, SEACEN and SEANZA Forum for Bank Supervisors. SEACEN is a training center and research organization based in Kuala Lumpur.

in international forums, such as the BIS and G-20, on the expansion of regulatory and supervisory perimeters to non-bank affiliates, increasing minimum capital for total and Tier 1 element risks under the Basel framework, and the introduction of minimum leverage ratios for bank capital, on their banks, corporations and developmental strategies. he invitation of some emerging economies to join BIS and the establishment of the Hong Kong Representative Office of BIS in 2002 were partly intended to incorporate regional inputs in “the Asian way” in the universal banking regulations and supervisory standards. Traditionally, the BIS standards were exclusively tailored to the needs of the well developed banking systems and matured financial markets in Europe and the United States.

he college of regional bank supervisors would not only supervise the operations of regional financial firms, but it would also discuss the implications of the proposals of the expansion of capital requirements and accounting standards on quasi fiscal operations, public sector companies (including banks), and affiliated companies (both shadow banks and non-financial corporations), and off-balance sheet items. he setters of accounting standards in the region should work on how to improve credit and collateral valuation standards in regards to business affiliates to avoid principal-agent and insider-trading problems. Other topics of common interest would include how to avoid pro-cyclicality and minimize deposit insurance rates. Based on their historical experiences and Asian culture, the nations of this region need to contribute to the global discussions on these issues. Supervisory coordination, however, should not extend to the creation of a safety net as ASEAN+3 is not a monetary union.

October 1, 2010.

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