The stability of the financial system is vital to achieve sustainable macroeconomic growth among member economies of the Asia Pacific Economic Co-operation (APEC) group.

This view was shared by about 100 delegates attending yesterday's APEC Finance and Development Programme (AFDP) 2003 Annual Forum in Shanghai. Among them were senior officials from financial ministries for member nations, as well as representatives from central banks and several international financial institutions.

Under the theme Establishing Stable Financial Systems: Policy and Challenge, the forum focused on key issues related to the stability of financial systems in Asia.

Tai-shin Dwon, deputy minister for International Affairs and the Ministry of Finance and Economy of the Republic of Korea, said the instability of financial systems may deteriorate during its intermediation functions.

"(It may) also distort decision-making in consumption and investment, thereby causing a contraction in the economy,'' he said.

Sensible measures should be developed to prevent a financial crisis and to control vulnerabilities in the financial system, he added.

"The government should go along with the most minimal and market-friendly regulations,'' he told the forum.

A balanced development of the financial markets between the lending sector, and bonds and stock markets should be attained as well.

He also noted that supervisory authorities should encourage financial institutions to keep adequate capital, disclose relevant information and establish risk management systems.

According to V. Sundararajan, deputy director of Monetary and Financial Systems Department under the International Monetary Fund, there are a number of areas where better compliance could contribute to sounder institutions.

He is leading a programme assessing financial system vulnerabilities of World Bank's member economies, including APEC members.

"In some developing economies, compliance with the best practices regarding credit policies and connected lending is weak, and poor lending practices remain by far the most serious threat to banking stability,'' he said.

Professor Fan Gang, director of China National Economic Research Institute, added that lending practices do need more regulation. He also stressed that basic and solid institutions such as property rights, legal frameworks, corporate governance and government accountability are the most important issues for financial stability in developing countries.

He also pointed out that effective domestic macroeconomic management is also important to avoid traps of high growth.

"(High growth) may hide problems for a long time, until they plunge the financial system into crisis,'' he said.

He went on to say that capital control is needed in the early stages of development, especially absorbing foreign direct investment in order to avoid risks in international financial markets and manage the impacts of macroeconomic cycles in the global economy.

The AFDP, co-sponsored by the Chinese Government and the World Bank, is aiming to strengthen capacity development in the APEC region by financing research, organizing forums and providing training courses.

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