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Weaving the Financial Stability Narrative in the Asean Region

Date: 01.21.2019

Place: Philippine International Convention Center, Manila, Philippines

Occasion: 2019 BSP-IMF Regional Dialogue on Financial Stability for ASEAN Central Banks, Ensuring Financial Stability in the Region: Some Policy and Practical Issues

Speaker: BSP Governor Nestor A. Espenilla, Jr., as delivered by Deputy Governor Chuchi G. Fonacier,

Governor PERRY WARJIYO of Bank of Indonesia, Governor NOR SHAMSIAH MOHD YUNUS of Bank Negara Malaysia, Deputy Director RATNA SAHAY (MCM) and Deputy Director ODD PER BREKK (APD) of the International Monetary Fund, fellow central bankers, colleagues in government service, friends from the private sector, international organizations, media, ladies and gentlemen, good morning.

It is a privilege to welcome all of you to this conference which we are co-hosting with the International Monetary Fund. The topic of financial stability needs little introduction. We have set it as an overarching and global policy objective for a decade now. And yet, everyone here knows that there is still so much about it that has to be learned. This is principally why we have structured this dialogue as a regional one rather than focusing on models and metrics. We value your participation and look forward to an active exchange of insights and the sharing of experiences in our common pursuit of financial stability.

For financial authorities in general and central banks in particular, there is little doubt that financial stability has become a key policy consideration. The breadth and depth of the Global Financial Crisis (GFC) make financial stability impossible to disregard.  This is true even for ASEAN despite its not being a direct party to the build-up of risks and the eventual materialization of the vulnerabilities.

The concept of “financial stability” is defined differently in different jurisdictions. For some, it may not even be formally inscribed as part of the legal mandate of the authorities.

Yet, we all understand that financial stability is ultimately about a thriving and well-functioning financial system. By this we mean that the financial system efficiently serves the needs of all financial consumers –especially the traditionally excluded, from corporates to households and to individuals – while mitigating the build-up of systemic dislocations.

Financial stability is therefore more than just the absence of instability or preventing the next crisis. There is a positive side to it, which is to ensure that the financial system continues to be a transformative tool for the public. This is the compelling case for why the authorities should be engaged in this policy sphere.


To be candid, the response in Asia towards the global reform agenda post-GFC was initially with marked hesitation. Many argued that the GFC was far from Asia, not just in terms of distance but more because the underlying factors that nurtured the crisis were an exception rather than the regional norm.

We were also reminded of the fact that the concern over the stability of the financial system is not a new idea in ASEAN. Coming out of the 1997 Asian Financial Crisis (AFC), there was renewed focus on managing banking risks, particularly currency and tenor mismatches. Appropriate and calibrated reforms were put in place.  Their benefits should now be fairly evident.

Yet, the crisis of 2008 was indeed different. It was not the size and speed of the dislocation but rather the fact that it required a more fundamental re-think of risks in the financial system and how we manage them. In effect, it surfaced a lot of things that we did not know but should otherwise know about financial market risks.

To my mind, two lessons specifically stand out.

First, the previous economic orthodoxy looked at financial market volatilities as being fully subsumed under the management of the macroeconomy. For as long as the macroeconomy was growing and stable, financial market imbalances were only temporary and expectation was that the market would eventually return to the normal state.
The realization from 2008 was that we needed to re-assess our framework and our models. Stress points in the financial market are not simply auxiliary issues.  Instead, they require our direct attention. These stress points could materially impair the financial market with effects that could eventually spill over into the real economy. To aggravate matters, the stylized models and metrics were called into question, with comments ranging from proposals to augment at one end to heavy criticisms at the other end.

Second, we were reminded that what makes “systems” interesting is that they are more than the sum of their parts.

In the financial system, there are institutions that make up the market, and there are the market outcomes which reflect the continuous interaction among institutions, products, and individuals. If our stated policy is to nurture a well-functioning financial system, we therefore need to understand the institutions that we oversee and nature of the interactions within the financial system.

Let me be clear that we are not advocating one over the other. It remains essential that banks operate in a safe and sound manner. What we now realize, however, is that there are risks that can develop from an interconnected system, even when banks are within established parameters of safety and soundness. This highlights how the Fallacy of Composition is a policy concern.

These two lessons change the way we understand financial markets and the way we oversee it. At the very least, we can no longer afford the old normal under the previous orthodoxy. We cannot take the financial market as a passive add-on to the macroeconomy.  Rather we must view it as one that can directly cause systemic risks. In turn, systemic risks are inherent to the financial market because of the way financial choices are interlinked across agents, across markets and across time. Systemic risk cannot be assessed whether it is present or absent but rather by our ability to manage the disruptions that they may cause.


All these realizations define the agenda of the new normal that is financial stability. We can see this in the global reforms which aim either to strengthen financial institutions or strengthen the financial system.

The net effect is that when we think of mitigating against systemic risks, we are no longer just focused on the big shocks that can cause extensive harm. Instead, we are more cognizant of shocks which on their own are small and appear independent of each other but could otherwise commingle and create systemic risks. This commingling and evolution of risks reflect the very point of interconnectedness in the financial system, amplifying smaller risks and passing them on via contagion.

Here then lies the challenge. If we have to consider every independently small risk that could possibly pool themselves and evolve into financial system-wide disruptions, then that would clearly be too broad a scope to manage effectively. If we consider further that the state of stability dynamically changes with its market environment (i.e., that it cannot be defined by numerical thresholds derived from past events) and that the whole point of financial stability is to address today the possible vulnerabilities of the future, then we must be able to accept that a coherent narrative of what-could-be may be more useful than absolute models and metrics.

This is a whole new world, a mindset shift, for those of us deeply ingrained in the steep tradition of evidence-based and model-driven central banking.

Yet, the once-in-a-decade tail events of financial crises are still too often an occurrence to dismiss the need for and the value of financial stability. Disruptions do occur and while cycles ebb and flow, the impact to stakeholders of a less-than-well-functioning financial system are real and could be permanent.


It is this search of a narrative that brings us together here. We welcome the unmatched opportunity to share each other’s narrative in our respective journeys towards financial stability. And even for our colleagues who are at the inception of this journey, hearing the narratives of those who travelled before you has its great reward.

Over the next day and a half, we shall cover a landscape of issues. ASEAN has taken remarkable strides towards regional integration.  Its having financial stability as a pillar of the ASEAN Economic Blueprint 2025 deserves increased attention. Integrating financial stability into the longstanding mandate of financial authorities is a key element of the journey, both for our respective jurisdictions and for ASEAN as a collective community.

So much has already been said of the synergies between financial inclusion and financial literacy.  Much less is known of how financial stability fits into this paradigm. This is surprising when one considers that the objectives of inclusion, literacy and stability naturally converge.

The role of regulated entities in the financial stability story is also not so clear. Sometimes, we think of the covered institutions as simply resisting any form of reform at any level. Do senior market players include notions of systemic risk in their strategic assessment? If so, how does their behavior affect market outcomes and the actions of the financial authorities?

These are the policy narratives that we can look forward to in this regional dialogue. Alongside these, we will benefit as well from a specific survey conducted by the IMF which will show the state of play on financial stability in the region. Ranking officials from ASEAN jurisdictions provide further substance to the survey by sharing with us more details of their own journey on stability, from setting up their financial stability organization to executing their policy agenda. Luminaries from multilateral institutions then round up this dialogue by providing their insights on financial stability and the road ahead.


Ladies and gentlemen, as we expect financial market volatilities to increase and global growth prospects to decrease in the months ahead, focus on financial stability at the start of the year is timely. We are cognizant of the challenges with the execution of a financial stability agenda but this, on its own, does not take away the relevance and urgency of our work in mitigating the build-up of systemic risks.

We are humbled by the thought that we do not have a full understanding and an absolute certainty of what may lie ahead. We just know that this journey is important … because a healthy financial market is essential for sustaining economic development, improving the financial well-being of stakeholders and avoiding the sharp dislocations from future crises.

We look forward to focusing on methods, models and metrics for financial stability soon. For now, there is much to learn from the rich narratives that will surely be shared at this regional dialogue.

I wish all of us all the best for 2019 as well as a productive dialogue over the next two days.

Thank you for your attention and Welcome to Manila.