Financial Sector Reform—an Investment in Asia’s Future

Further development of Asia’s financial sector needed to meet region’s challenges

Regional integration can support growth and jobs, but with some risks

Asia needs proactive policies, structural reforms to weather future crises

During the day-long gathering on the future of Asian finance, Christine Lagarde said deeper financial systems could provide a shield against volatility, and also provide opportunities for consumers and business.

“What we are talking about is financial deepening within countries. And that means a shift away from traditional banking practices focused on deposit taking, and commercial lending to corporations,” she said.

Lagarde’s visit, which also included meetings with top Indonesian officials, coincided with the launch of a book, published by the IMF on the outlook for the financial sector in the region.

The state of Asia’s financial system

Asia’s financial systems range from low-income economies where few have access to financial services, to some of the world’s most advanced global hubs. A model based on conservative banking has served the region well, underpinning growth and stability, but progress in developing stock and bond markets has been slow.

Asia learned important lessons from the 1997-98 Asian financial crisis, which helped cushion the blow of the global financial crisis. But rapid credit growth, and household and corporate leverage mean resilience may be weaker during a future crisis.

The region’s stock markets are large, but in many countries, stronger regulation could enhance their role as a reliable source of financing for companies. Bond markets have grown rapidly in recent years, and encouraging more institutional investors will help recycle Asia’s large pool of savings into long-term investments.

Financial sector growth likely to slow

As countries get richer, their financial sectors also grow, but the pace slows over time. As Asia catches up with rich economies, the pace of growth of its financial sector is likely to slow. Aging will also be a drag on some of the region’s economies, but younger countries, such as India and Indonesia should benefit from a demographic dividend.

Today, Asia’s financial systems are relatively conservative and simple, and international linkages are small. But the complexity of these systems, and global integration will grow in coming years, presenting new challenges for regulators and supervisors.

This is particularly true in Hong Kong and Singapore, Asia’s...