Abstract
Excess savings and rising capital inflows—especially since the early 2000s—gave Asia ample liquidity with lower borrowing costs. This would spur domestic demand and growth, helping begin the process of rebalancing the region’s economic structure. As this happened, the behavior of economic agents—banks, firms, and households—also changed. The preference toward investing in financial assets increased. This added the risks of procyclicality discussed in previous chapters. Based on flow-of-fund analysis, we showed in Chap. 2 that the rise in bank assets in emerging Asia was driven by a surge in noncore liabilities associated with capital inflows. While this raised some concerns over its impact on financial stability , the precise extent and nature of the effect remains to be investigated. To what extent does the rise in noncore bank liabilities threaten Asia’s financial stability, and how does it influence the effectiveness of standard monetary policy ?
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