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The Political Economy of Asian Regionalism pp 85–104Cite as

Regional Financial Architecture Beyond the Global Financial Crisis

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Abstract

This chapter examines recent developments in and future prospects for regional financial and monetary cooperation and integration in East Asia and suggests some issues that could contribute to more constructive development of the regional financial architecture. The regional financial architecture has faced new challenges because Asia’s regional economic development is a real factor of the global economy. The global financial crisis and global imbalances are good examples. This implies that the regional financial architecture is no longer regional-only. The authors also argue that rigorous multilateral surveillance on a regional basis, consistently applied and with associated peer pressure, can help build the domestic financial architecture and ultimately mitigate the excessive macroeconomic volatility. Furthermore, a regional financial institute could be a venue for building consensus and reflecting regional views in the negotiation process of setting global financial standards.

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Notes

  1. 1.

    There is nothing new in setting up a regional financial organization. In addition to several institutional inventions observed during the European monetary integration process, there already exists the Arab Monetary Fund and the Latin American Reserve Fund established in 1976 and 1991, respectively. However, such regional funds have not been effectively used for risk management at the regional level, mainly due to lack of the members’ strong commitment and operational transparency.

  2. 2.

    They are the Republic of Korea; the PRC; Japan; Hong Kong, China; Singapore; Thailand; Malaysia; the Philippines; Indonesia; Australia; and New Zealand.

  3. 3.

    The PAIF will act as an investment fund and new asset class for regional and international investors who wish to have a well-diversified exposure to bond markets in Asia. The FoBF is a two-tier structure with a parent fund investing in a number of country sub-funds comprising local currency denominated bonds issued in the respective EMEAP economies. While the parent fund is confined to EMEAP investment, the country sub-funds are intended to provide local investors with low-cost and index-driven investment vehicles and at the same time give regional and international investors the flexibility to invest in the Asian bond markets of their choice. (Park et al. 2004).

  4. 4.

    The IMF is expected to play the role of an insurance firm that has its own monitoring and surveillance device. However, the presence of a regional fund as a cooperative partnership fund will complicate the welfare consequences, depending on whether the regional fund is in a better position to monitor the effort than the IMF. If the regional fund cannot effectively harness its monitoring capabilities to reduce the moral hazard problem, countries may become less cautious; the IMF will tend to provide less insurance. The regional fund may crowd out the more effective insurance provided by the IMF, thus becoming completely dysfunctional. In this regard, peer monitoring is essential for controlling the moral hazards involved in the partnership fund, and may even improve welfare by enhancing the countries risk sharing. For a similar logic, see Kandel and Lazear (1992).

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Author information

Authors and Affiliations

  1. Department of Economics, Seoul National University, Seoul, Republic of Korea

    Soyoung Kim

  2. College of International Studies, Kyung Hee University, Seoul, Republic of Korea

    Doo Yong Yang

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  1. Soyoung Kim
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  2. Doo Yong Yang
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Correspondence to Doo Yong Yang .

Editor information

Editors and Affiliations

  1. Asian Development Bank Institute, Chiyoda-ku, Tokyo, Japan

    Giovanni Capannelli

  2. Asian Development Bank Institute, Chiyoda-ku, Tokyo, Japan

    Masahiro Kawai

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Kim, S., Yang, D.Y. (2014). Regional Financial Architecture Beyond the Global Financial Crisis. In: Capannelli, G., Kawai, M. (eds) The Political Economy of Asian Regionalism. Springer, Tokyo. https://doi.org/10.1007/978-4-431-54568-2_5

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