- Review of Global Shock, Risks and Asian Financial Reform
Since the 2007–08 Global Financial Crisis (GFC), there have been many books written on the future of Asian finance and financial reform. This book, edited by Iwan J. Azis and Hyun Song Shin from the Asian Development Bank (ADB)/ Cornell University and Princeton University respectively, is the most comprehensive and in-depth study of the issues facing Asian finance to date. A hefty volume of over 700 pages and 18 chapters, written by ADB specialists, leading academics and financial policymakers, it deserves serious attention. Professor Shin has since moved to become the Economic Adviser and Head of Research at the Bank for International Settlements, helping to shape one of the most creative research agendas on current global finance, monetary and regulatory policy.
The book comprises five parts: an introductory overview and summary by the editors; macro-prudential supervisory system and development impact; issues and challenges for the legal and institutional framework; (regional) financial integration and cooperation to support financial stability; and financial supervision and development challenges. Each section has an introduction with an overview of the findings and issues raised.
The book is the outcome of an ADB research project on regulatory reform post-GFC and is very useful as a compendium and reference on regulatory issues for Asia up to 2012. The book focuses mostly on East Asia (particularly ASEAN countries). In contrast, South Asia and the Middle East economies are not given as much attention as they deserve.
The overview in Part I by Azis and Shin provides a very useful summary but lacks a historical perspective, which begs a simple yet strategic question: as Asia evolves from the world’s global supply chain to become a net lender through high savings and surplus, can it develop its own financial sector to better use its savings? Currently, [End Page 413] the region suffers from exporting excess savings to advanced markets in London and New York and re-importing these back through foreign direct investments and portfolio flows that earn significantly higher returns. The region is also hostage to volatile capital flows and both India and China still maintain capital controls.
How Asia manages its financial sector, particularly the difficult transition to totally open capital markets, will define its role in global leadership in the twenty-first century.
In other words, the book takes the orthodoxy as given, recognizing that financial deepening is broadly good, albeit with risks to be managed. Even though it recognizes that there is no “one-size-fits-all” regulation or regulatory structure, it hints at current advanced markets — dominated by American and European thinking — as a model for Asia.
The field of finance moves so rapidly that since the book was written, four major trends and events have turned and are turning the industry almost upside down. First, macroeconomic theory and finance is being challenged by central banks’ unconventional monetary policy of moving interest rates beyond the lower boundary of zero. The spillover effects of such a move on financial markets and investor behaviour are still being digested and the outcome is highly uncertain. All that can be said is that savers recognize that they are being taxed indirectly, but steps made to adjust their portfolios remain to be seen. Second, financial technology platforms are challenging the payments, investment and transaction profits of traditional banks, insurance companies and asset managers. Their market valuation is currently worth more than the market capitalization of the largest banks. Third, as the implementation of the complex regulatory and legal reforms introduced post-GFC is being phased in, there has been some unexpected impact on market behaviour, such as flash crashes, high volatility and sudden liquidity stops. It is unclear whether these are due to new technology from algorithmic trading or simply traders becoming risk-adverse in light of tighter regulations. Fourth, the international financial architecture, particularly the Bretton Woods institutions are being challenged by the creation of the Asian Infrastructure Investment Bank...