Academic journal article East Asian Economic Review

Strengthening ASEAN+3 Regional Financial Arrangements: A New Framework beyond CMIM *

Academic journal article East Asian Economic Review

Strengthening ASEAN+3 Regional Financial Arrangements: A New Framework beyond CMIM *

Article excerpt


ASEAN+3 monetary and financial cooperation emerged with the regional needs for the financial self-help measures after the Asian currency crisis in 1997-1998. Since then, regional financial cooperation in East Asia has been induced by gradual financial liberalization with increasing cross-border capital flows, establishing regional financial arrangements, and developing local currency bond markets. However, East Asian economies had been lagging behind in the development of their financial systems relative to that of real sectors. Underdevelopment of financial sectors was due to several reasons: for instance, heavy dependence on bank-intermediated financing and insufficient long-term credits, high degree of risk vulnerability to external shocks, thin regional bond markets, and premature capital markets. Successful regional financial cooperation facilitates effective risk sharing through better allocation of financial resources and ultimately promotes regional economic growth.

An increasing number of studies have examined the important role of regional monetary and financial cooperations. Rey (2013) explores that the center economies' monetary policy influences other peripheral countries' economic conditions, which implies that non-center countries are sensitive to international financial fluctuations. Recent studies have documented its importance that the movements of the advanced economies affect the economic conditions of developing and emerging economies (Ahmed and Zlate, 2013; Aizenman et al., 2015; Forbes and Warnock, 2012; Fratzscher, 2011). In terms of feasible conditions for regional economic cooperation, there is a growing consensus that the East Asian economy requires gradual step-by-step progress to build the regional emergency liquidity facility of coordinated crisis-resolution mechanism (Hill and Menon, 2010; Kawai, 2009, 2014; Ogawa and Shimizu, 2011, Oh et al., 2009 among others). Eichengreen (2010) examines several challenges for regional financial arrangements and proposes that countries ante up real funds and create stand-alone institution equipped with economic surveillance capacity. In particluar, Lamberte and Morgan (2012) suggest to promote the regional financial arrangement cooperating with the global financial safety nets and to build a regional bank to improve regional financial institution.

Rhee et al. (2013) propose changes to the IMF articles of agreement to allow for lending or guarantees to regional arrangements directly and desirable features of regional mechanism. Siregar and Chabchitrchaidol (2013) raise a series of fundamental questions about the CMIM facility, including the limited CMIM's role and AMRO's surveillance activities. They emphasize (i) the need to integrate the CMIM, as a multilateral swap facility, with bilateral swap facilities to backup the limited amount of CMIM fund, and (ii) the need to deliberate ex ante and ex post conditionalities as the safeguard measures against moral hazard problem of the potential recipients. Krishna et al. (2014) propose two ways to strengthen a regional financial arrangement in East Asia: (i) establishing a currency arrangement under the CMIM to increase the usage of local currencies, and (ii) creating a cooperative framework between the AMRO and the IMF in the area of surveillance.

This paper contributes to the literature in the following point. The regional financial arrangement has been at the forefront of the ASEAN+3 monetary and financial cooperation. Despite the significant progress of regional financial safety nets in East Asia, some fundamental issues about the CMIM operation and the role of AMRO have been raised to enhance their effectiveness. This paper reviews the operational limitations of the CMIM and make a design of a new regional financial arrangement, tentatively named a 'Reserve Fund Facility' (hereafter RFF) which operates under a centralized paid-in capital mechanism in the region.

The remainder of the paper is organized as follows. …

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