This paper examines the unfolding of the U.S. sub-prime-generated turmoil and its potential spillover effects on Asia's emerging financial systems. The sub-prime mortgage mess has revealed key structural weaknesses in the evolution of modern credit markets. Although emerging Asian financial markets have suffered only limited impact thus far, they remain open to further contagion given underlying weaknesses in the region's financial systems. Rapid financial globalization also poses new challenges as the region's largely unsophisticated banking and financial systems strive to keep up with the evolving financial environment. Policy priorities to foster regional financial stability include enhancing transparency and governance, improving risk management, strengthening regulation and supervision, and deepening and broadening financial systems, especially by developing local currency bond markets.
We thank Yung Chul Park, Doo Yong Yang, and other participants in the Asian Economic Panel Meeting, Seoul, Korea, 25–26 April 2008 for helpful comments. The views expressed in this paper are the authors' and do not necessarily reflect the views and policies of the Asian Development Bank (ADB), its board of directors, or the governments that ADB's members represent.