Panel on The Way Forward Comments on Dollar Currency Risk in Asia by R. Sean Craig IMF Resident Representative in Hong Kong HKIMR Conference on Currency Internationalization Hong Kong, December 11 th, 2012

Reliance on dollar credit in Asia makes banks vulnerable to tighter dollar funding

Japanese banks face less funding pressure and expanded syndicated lending rapidly in Asia

Asian banks now lead in global long term finance (project, aircraft, shipping credit)…

…but US banks still dominate overall global syndicated lending

As Euroarea banks deleverage, Asian banks step in but face heightened dollar funding risk Asian international credit (for trade, supply chain, project finance) is in dollars, requiring dollar funding … and, thus, vulnerable to dollar liquidity shocks (e.g. cross-currency swaps loose liquidity) Especially long term forms of dollar credit

Asian dollar bond issuance dollar is growing fast but the capacity of the market is limited

…and spreads compress on capital inflows, raising concerns of under-pricing of credit risk

Policy frameworks need to adapt to increased dollar liquidity risk in Asian financial systems Strengthen framework for central bank cooperation to manage dollar liquidity shocks to Asian bank Clarify role of FX swaps arrangements among Asia central bank and with Fed, ECB, and IMF ECAs and IFIs provide more long-term dollar funding to support long term project finance Develop the role of regional capital markets as an alternative source of private long term finance In the long run, foster a shift from a dollar-based to a more multi-currency financial system in Asia