Foreword viii

Acknowledgments x

Abbreviations xi

Executive Summary 1

Navigating Shocks through Stronger Foundations and Deeper Financial Integration 2

Chapter 1. Navigating Spillovers from Global Shocks: Why Fundamentals Matter 5

  Highlights 6

  I. The Global Macrofinancial Environment: Recent Developments 7

  II. ASEAN+3 Financial Market Development 8

    Equity and bond markets responded more to domestic factors 9

    Capital flows reflected country-specific factors 10

    Foreign direct investment resilience was supported by structural growth opportunities 10

    Foreign exchange market movements varied between countries 11

    Policy responses also diverged, with the focus on safeguarding stability while supporting growth 12

  III. ASEAN+3 Financial Stability—Resilience in the Storm 13

    Several cross-cutting vulnerabilities deserve continued regional attention 14

  IV. Looking Ahead: Key Risks to Financial Stability 21

    An AI-related market correction could amplify regional spillovers 21

    Persistent US dollar volatility remains a key external vulnerability 25

    Growing nonbank financial institution leverage and linkages could amplify global financial stress 26

    Crypto assets and digital finance create new channels for cross-border financial spillovers 27

    Digital fraud and cyber risks could undermine confidence in the financial system 30

  V. Policy Implications 30

    Preserve macrofinancial credibility and policy buffers to shocks 31

    Shift from bank-centric to system-wide surveillance 31

    Harness digital finance while safeguarding financial stability 32

    Strengthen regional cooperation and crisis readiness 32

  References 33

Chapter 2. Riding the Same Wave? Financial Cycle Synchronization and Spillovers in ASEAN+3 34

  Highlights 35

  I. Overview 36

  II. ASEAN+3 Financial Synchronization with the Global Cycle 36

    Financial conditions—stronger comovement during stress and periodic divergence 36

    Financial synchronization with the global cycle has moderated outside crises 39

    Global transmission differs across asset markets 40

    Global factors become less dominant outside crises, while regional and economy-specific drivers gain importance 42

  III. Global Shock Transmission to ASEAN+3 Financial Flows and Conditions 43

    Portfolio flow responses to global shocks remain negative, but have weakened 43

    Global shocks continue to tighten FCIs, but sensitivities have moderated 45

    US monetary policy shocks continue to affect regional asset markets, but their effects have become less persistent 46

  IV. What May Explain the Moderation in the Sensitivity of ASEAN+3 Financial Conditions to the Global Financial Cycle? 49

    External financing composition and maturity influence shock transmission 49

    Regional influences add another layer to ASEAN+3’s financial synchronization 51

    Policy frameworks and buffers could influence how shocks are absorbed 52

  V. Policy Recommendations 57

    Strengthen resilience to major global shocks through buffers, deeper markets, and system-wide preparedness 57

    Enhance regional surveillance and cooperation to manage cross-border shock transmission 57

    Manage economy-specific pressures through tailored and balanced policy frameworks 58

  References 66

Chapter 3. Advancing ASEAN+3 Financial Market Integration: The Role of Digital Financial Platforms 67

  Highlights 68

  I. Overview 69

  II. How Integrated is the ASEAN+3 Region and Why Does It Matter? 69

    Portfolio integration lags trade and FDI linkages 70

  III. What Are the Key Obstacles to Regional Financial Market Integration? 72

    Regulatory and legal heterogeneity 72

    Gaps in market infrastructure 73

    Underdeveloped FX and money markets 74

    Investor preferences and perceptions 74

  IV. Why Does Regional Financial Market Integration Matter for ASEAN+3? 75

    Capital allocation and regional savings 75

    Shock absorption and risk sharing 76

    Benefits for firms, SMEs, and market development 76

    Governance, information sharing, and policy safeguards 76

  V. Financial Market Integration: Current Efforts and Potential Solutions 77

    Promising initiatives but limited uptake 77

    The tension between incremental and 'big bang' approaches 78

  VI. What Are Digital Financial Platforms (DFP) and How Can They Help Foster Regional Financial Market Integration? 79

    Introduction to DFP 79

    How DFPs can address obstacles to cross-border financial-market integration 80

    Regulatory and legal heterogeneity 80

    Gaps in market infrastructure 80

    Underdeveloped FX and money markets 82

    Investor preferences and perceptions 82

    Implications across asset classes 83

    What recent regional developments reveal about the potential of DFPs 85

  VII. Policy Discussion: Exploring Digital Financial Platforms and Facilitating Financial Market Integration 85

    Consideration 1: Non-settlement financial assets versus settlement assets 86

    Consideration 2: Infrastructure functions versus market services 87

    Consideration 3: Institutional use versus retail use 88

    Consideration 4: Domestic readiness versus regional interoperability 89

    Cross-cutting consideration: Market liquidity and integration with existing markets 90

    Cross-cutting consideration: Migration and coexistence with existing infrastructure 90

    Execution roadmap: Sequencing and controlled experimentation 90

    Financial market integration: The way forward and positioning DFPs in the blueprint 91

    Financial stability considerations from market integration and DFPs 94

  References 101