ISAS Working Papers

The global financial crisis affected most economies primarily through three channels– declining trade volumes, exchange rate pressure and asset deflation. The paper focuses on the impact of the crisis in the four major economies of South Asia viz. Bangladesh, India, Pakistan and Sri Lanka and how by a combination of swift actions on the monetary, fiscal and exchange rate fronts the worst consequences of the crisis were averted. The regulatory and supervisory systems in these four economies are then benchmarked against certain desirable norms, which have emerged out of post-crisis international deliberations. It is felt that South Asian regulatory systems perform fairly well vis-à-vis these norms. The paper also discusses three major unresolved issues on the regulatory and supervisory dimensions. With regard to the Principles versus Rules-based regulation controversy, it recommends that a more promising and safer course of action would be to make the existing (rules-based) system more flexible and dynamic. Secondly, with a view to strengthening market discipline, several new initiatives seem to be in order, the most important being the switchover to a riskbased premium of deposit insurance. Finally, the paper discusses the crucial issue of independence of regulators and supervisors from official (government) interference and market “noise”, in executing their mandate of financial stability. The authors are of the view that the future success of financial reforms in South Asia will be crucially contingent upon how successfully the regulatory architecture adapts to the twin dictates of financial development and financial stability, the extent to which market discipline can be usefully deployed as a pillar to support this architecture; and the degree to which regulatory and supervisory independence is not compromised.