1   Good morning, ladies and gentlemen.  It gives me great pleasure to deliver the opening remarks at this year’s Asian Bond Markets Summit.  Let me extend my warmest welcome to everyone here today, especially to visitors from abroad.  I would also like to congratulate the organisers for an excellent programme and the strong participation by many industry practitioners.   

2   The centerpiece of today’s conference on Asian bond markets is an appropriate one.   Regional debt markets have witnessed considerable growth, as well as challenges since the Asian Financial Crisis.  Barely ten years ago, Asian borrowers relied almost exclusively on bank intermediation for their funding needs.  This funding also depended on rolling over short-term lines, often with foreign currency exposure, to meet long-term financing needs.  That resulted in what turned out to be an over-concentration of risks within the banking sector involving both duration and currency mismatches - fragilities that were exposed when the crisis broke and confidence plummeted. 

3   Learning from the harsh lessons, regional countries have been actively developing the local bond markets to build a second pillar of intermediation, by providing an alternative source of financing to traditional bank lending.  Some of the notable efforts led by regional finance and monetary authorities include the Asian Bond Markets Initiatives (ABMI) that has several working groups looking at a range of development issues.  Many of you will also be familiar with the Asian Bond Funds launched by regional central banks, to catalyse investor demand and interest in Asian bonds as an asset class – but perhaps more importantly, to trigger infrastructure improvements as well as tax and other necessary reforms to facilitate cross-border investments.  Among securities regulators as well, the Asean Capital Market Forum are collaborating to consider areas of harmonization.  These regional co-operations will be ongoing work; and going forward, I hope to see greater partnerships between private and public sectors in market development initiatives.  In recent years, we have also seen multilateral organizations, such as the Asian Development Bank (ADB), Central American Bank for Economic Integration (CABEI) and the International Finance Corporation (IFC), issue bonds in local currencies with the aim of creating a platform for international issuers and investors to tap the Asian markets.   The ADB itself is a key player in its research, surveillance and market roles to facilitate deeper and more liquid Asian bond markets.

4   Today, the Asia ex-Japan domestic bond markets have seen remarkable growth – increasing in size by more than five times in the last decade to about US$3.5 trillion¹. But amidst these somewhat positive developments, the fallout from the US subprime market is now being felt, with the current credit market squeeze leading some to argue that because Asian markets have been mostly spared the turbulence felt by more developed debt and credit markets, should we not slow the pace of innovations and developments in Asian bond and credit markets?   

5   Allow me to put to you why the need to develop deep and liquid Asian bond markets is as relevant as ever.  Specifically:

(a) the need for better matching of domestic funding needs to the level of household and corporate savings;
(b) the continued need to enhance financial stability through developing the mutually supporting pillars of bank-based and capital market intermediation; and
(c) improving the distribution of risks. 

Let me elaborate a little.

6   First, the imperative of staying the course in developing Asia’s bond markets has not changed.  It will remain a beneficial end-goal to anchor higher levels of capital market intermediation in Asia, by facilitating domestic market debt issuance to match the strong pace of household and corporate savings in the region.  Despite exponential growth, the outstanding size of Asian bond markets still lag behind global bond markets.  Asian debt markets continue to be seen as fragmented, with varying standards and rules.  Large cross-border risk exposures can become entrenched if the lack of domestic or regional investment opportunities compels the region’s financial institutions and asset managers to look far afield.  Up to a point, this represents diversification, but pushing beyond that boundary in search of yield into more sophisticated overseas markets and more complex financial products means the risk profiles may actually increase too. 

7   As Asian wealth accumulation continues, the challenge will be to better utilize and leverage on the substantial Asian savings for Asian investments.  In short, the emergence of attractive and investable domestic market instruments can help mobilize the growing Asian savings pool within the region more efficiently to support economic growth and development, by attracting domestic and foreign investors to the local markets. 

8   It is hence important to avoid the mistake of planning only based on the last crisis.  In the late 90s, it was a banking system blow-up.  In summer this year, it is a credit and money market seizure.  Each financial crisis or shock will bring with it unique circumstances and lessons.  But in and by themselves, they should not become reasons to dampen market development and growth.  Deeper and broader markets can offer resilience and allow more efficient allocation of resources and risks by mitigating market distortions.   Indeed, the history of innovation in financial markets provides many examples of periods of rapid change, accompanied by challenges in assessing risk and value.  This may be driven by concerns about the adequacy of investor and consumer protection, or by unexpected behaviour of prices, defaults and break-down in correlations.  That process of risk discovery should be distinguished from the impetus for continued market dynamism and development. 

9   What is important is that financial institutions will need to keep abreast with innovations by having risk management practices stay current and relevant.  Similarly, among central banks and regulators, the process of enhancing capabilities in surveillance, monetary management and regulatory areas will be important.  Another key component is that the financial talent pool has to maintain the training and learning, to better understand and manage risks arising from new and more complex products; with industry associations and financial institutions themselves leading the evolution of good practices and standards. 

10   It follows then, that all investors will need to understand what they buy, and stress-test for non-traditional scenarios including on liquidity risks.  Where plain vanilla bond offerings might have sufficed when we started at the turn of the millennium, today’s search for alpha will no doubt continue to see the development of securitization and structured credit products, even if one believes that CDOs and CDO-squares will be banished to the backburners for some time.   

11   Another aspect then, is the importance of credit assessment capabilities in the face of new products.  As end-investors become de-linked from the originators and risks are disaggregated and distributed globally before oftentimes being re-accumulated (as we have seen in CDO structures), greater reliance has been placed on credit rating agencies.  To be fair to rating agencies, credit ratings measure the risk of default when a security is held to maturity, not market risk or liquidity risk.  Even then, the recent credit problems has reopened the question of whether the current incentive model should continue where the issuer and not investor pays for the ratings. 

12   There is no easy answer to this: ratings are valuable only if everyone knows them, but no investor will pay for information that is available to everyone else.  Some have suggested regulating rating agencies more, but that may have the undesirable effect of raising the barriers to entry, reducing competition and increasing regulatory moral hazard.  Perhaps the solution lies elsewhere: for instance, deregulate the market for rating agencies and promote competition, but at the same time establish minimum standards on areas such as transparency, methodology and timeliness. 

13   To conclude my opening remarks, I believe we are at an exciting phase of market development in Asia, alongside economic developments.  Asian bond markets will be part of that evolution and transformation notwithstanding the prevailing credit market distress.  This will not be without risks but will certainly present new opportunities and challenges. 

   I note that you have an exciting agenda ahead of you to discuss many of the issues that I mentioned.  May I wish you all most fruitful sessions.

^{1 Source: Bank of International Settlement, September 2007}