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Terms of Reference
Liberalization of Cross-Border Capital Flows and Effectiveness of
Institutional Arrangements against Crisis in East Asia
Background
An important development in international financial markets over the
last ten years is the rapidity and magnitude of the resurgence of private
capital flows to East Asia since the 1990s. While the growth in private capital
flows to East Asia is only expected in light of the increasing integration of the
region’s capital markets, managing these flows has become an important
challenge for most countries in the region, particularly in dealing with surges
in short-term flows and their impact on macroeconomic stability. Given that
most capital markets in the region have been small relative to global markets,
their lack of depth and liquidity makes the region vulnerable to sudden
movement in (large) capital flows. While an effort has been made and still
on-going to promote further development of both debt and equity markets,
the development process could take some time. There is therefore a need for
effective prudential measures to minimize market distortions and promote the
orderly absorption of foreign capital.
Over the years East Asian countries have undertaken various
liberalization measures on cross-border capital flows. The liberalization efforts
are expected to intensify as the region becomes more closely integrated
economically as well as financially. As direct controls on capital flows are
removed to allow for freer flows of capital, the need for enhanced disclosure,
harmonized accounting standards and good governance has become
indispensable in prudential management of these flows. In particular, the
development of effective prudential measures, including quality monitoring
and supervision as well as the above institutional arrangements, is seen as
essential in managing capital flows to ensure that they do not lead to
excessive risk taking.
Objectives
This study will specifically look at the regulatory implications of crossborder capital flows in East Asia. In particular, the study aims to:
1. Review and assess the effectiveness of current regulatory and
supervisory regimes on cross-border capital flows in East Asia,
including application of governance measures, disclosure, and
accounting standards, in ensuring the efficient management of
capital flows.
2. Review and assess regulatory and supervisory practices being
adopted in other regions, particularly in developed countries in
North America and Europe, and how they are effectively
implemented in the liberalization of their capital accounts.
3. On the basis of (1) and (2), identify necessary institutional
arrangements and develop best regulatory and supervisory
practices that could enhance management of capital flows in East
Asia and the region’s capacity to effectively address any adverse
movement of these flows.
Output
1. A comprehensive and comparative analysis of existing regulatory
and supervisory regimes in East Asia, including a stock take of
existing regulations and measures being implemented in each
country.
2. A comprehensive and comparative analysis of regulatory and
supervisory measures implemented in developed countries and their
implications and possible application to East Asian countries.
3. A list of best regulatory and supervisory practices, including policy
frameworks and policy recommendations on how to build more
effective regulatory and supervisory capacity to better cope with
increasing cross-border capital flows under a more liberalized
regime in East Asia.