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The Chiang Mai Initiative (CMI) is an important first step in creating a regional cooperative system that can be activated immediately to provide liquidity support to any member country. The structure and elements of the CMI, and those of the Asian Bond Market Initiative — a comprehensive plan for the development of regional bond markets — are discussed.

Banks play a central role in market economies. They facilitate payments and grant credit and they convert short to medium term deposits into much longer loans to companies, consumers, and governments, which are irreplaceable functions economically. But they do not only have a large economic impact; their proper functioning affects everybody’s day-to-day life. Any challenge to such proper functioning is therefore an immediate and significant political concern.

This chapter reviews knowledge about the trade-offs involved in policies related to financial restructuring in banking and corporate sector crises. It examines a micro dataset for 700 companies in nine crisis countries to determine policies that are important in minimizing the cost of the crises. The analysis reveals that liquidity support early in the crisis and the use of a government-run asset management corporation can mitigate the severity of a financial crisis while government guarantees of the banking system's financial liabilities do not appear to be helpful.

This chapter is devoted to exploration of emerging new realities of liquidity facilities for the sovereigns and sovereign debt restructuring in the global economy. Prospects for establishing orderly sovereign debt-restructuring mechanisms are very limited and the disorderly case-by-case debt restricting appears to favour the financial markets relative to sovereigns. In fact, there are considerable uncertainties in regard to the liquidity support facilities available in future in the global economy, particularly for meeting the needs of developing economies. The prospects for formal debt restructuring mechanisms that would give comfort to the sovereigns at the time of fiscal stress do not appear to be very bright. In such a situation, the assessment of debt sustainability by policymakers will have to take account of the perception of financial markets, the prospects for liquidity support and in the extreme case, the scope for relatively smooth debt restructuring.

This chapter analyzes the possible need for insurance of money market mutual funds. The issue is of particular concern given the vulnerability of those funds, in particular, prime institutional funds, to contagious runs due to the money-like nature of their liabilities. It argues that the true competitive impact of expanded insurance on the banking and money market industries requires more detailed study of the appropriate cost and pricing of insurance, before any firm conclusions can be drawn. Given all of the difficulties of extending an insurance regime to money market funds, a more practical approach might be to make clear funds are eligible for lender-of-last-resort support either directly or indirectly through the banks. Liquidity support may be sufficient by itself to stop runs.