Financial Sector Reform: Longer-Run Policy Responses to the Asian Crisis

The Asian financial crisis of 1997 involved significant economic and social costs for the affected economies, but also highlighted fundamental weaknesses in the structure and operations of their financial systems. Not only were financial systems often underdeveloped, the financial liberalization which had occurred was not well founded. The type of deregulation which had occurred was not compatible with the underlying financial infrastructure, and led to severe problems of systemic risk. Affected economies reacted to the crisis in the short term with a variety of regulatory measures which included capital controls, blanket (100%) deposit insurance, intervention in and recapitalization of problem banks etc. But over the longer term, a more proactive approach has emerged as emphasis has grown on the need to build the core financial infrastructure necessary for financial sector development and economic growth. As well as concerns about the core financial infrastructure, there has been region-wide involvement in a number of policy initiatives to develop specific parts of the financial sector, which are found in more developed financial systems and seen to be increasingly relevant to a strong and efficient financial system.