Are economic integration and financial integration complimentary goods? A preliminary analysis on financial stability

• Main Author: Ravalo, Miguel Gabriel B.
• Format: text
• Language: English
• Published: Animo Repository 2022
• Subjects: Regional economics—Southeast Asia; Global Financial Crisis, 2008-2009; Economics; Finance and Financial Management
• Online Access: https://animorepository.dlsu.edu.ph/etdb_econ/37; https://animorepository.dlsu.edu.ph/cgi/viewcontent.cgi?article=1054&context=etdb_econ
• Institution: De La Salle University

COVID, international conflicts, and other disruptions to the financial system represents risks to the macroeconomy although this by itself is not new. Authorities had experience dealing with these kinds of risks even prior to the Global Financial Crisis (GFC). What has shifted is the focus towards contagions from within the economy coming from some shock, either from internal factors or unaccounted external sources. This focus forms the central thesis of the Financial Stability agenda as result of the GFC. In a post-GFC era, Financial Stability has since become the overarching policy objective (World Bank, 2012) with the post-GFC reform agenda premised on it and a multilateral institution, the Financial Stability Board (FSB), created to pursue the remodeling of the global architecture. This task has not been easy as we’ll later see in the succeeding paragraphs. The current framework for international trade which is premised on the growth and flow of Global Value Chains (GVCs), makes changes necessary for Financial Stability purposes difficult to implement. With Financial Stability as a critical policy consideration, there will have to be some re-thinking of cross-border linkages. First at the theoretical level, where the issues lie with financial stability. How does one assess the state of financial stability? This is more than simply finding a metric of measurement, requiring that the metric captures the scope of effects of interlinkages on Financial Stability. Then there are the concerns on if and how Financial Stability could co-exist with other existing cross-border policy objectives. If interlinkages create avenues for contagion, then would that not make integration incompatible with the long-term goals of Financial Stability? Further problems occur at the execution level, as Financial Stability has shaped the way policymakers interact with each other. Meaning that the post-GFC frameworks of financial systems were designed with Financial Stability in mind. Furthermore, in ASEAN, the integration of the financial systems in this region has an explicit financial stability pillar. Nonetheless, there have been studies which argue that financial integration and financial stability and domestic policies may form a trilemma where only, at most two of the three objectives can be met but not all three. built around the concept of cross-border integration. This last point creates a problem of policy execution. While policy makers both onshore and cross-border both routinely talk about financial stability as an important policy objective, in most cases there is little discussion about potential conflicts with other policy objectives. Furthermore, many jurisdictions have set-up specific financial stability/systemic risk bodies. In the US, one finds the Financial Stability Oversight Committee (FSOC), while in Europe you find the European Systemic Board. In ASEAN, it is treated as a separate pillar under the ASEAN Financial Integration Framework (AFIF)(ASEAN Secretariat). Our other problem is that the nature of interlinkages makes risks inherent in the practice of integration. The same cross-border linkages that provide the gains from trade could be the same avenues for cross-border contagion The question we ask then is: Does increasing integration via cross-border linkages come at a cost of maintaining financial stability?