Increasing financial interconnectedness in Asia and beyond over the past 2 decades has generated economic benefits, but,

at the same time, increased the region’s financial vulnerability. Financial contagion across closely interconnected financial

markets has been all too vivid during recent financial crises. It is, therefore, important that policy makers understand the extent

of financial interconnectedness and its macrofinancial implications when they consider macroeconomic policies. Likewise,

they need to coordinate policy responses to prevent a buildup of systemic risk and enhance financial stability and resilience.

In this spirit, this report investigates the trends and patterns of cross-border financial linkages and their regulatory and policy

implications. It finds that greater financial interconnectedness coincides with crisis periods, suggesting a possible source of

financial contagion. This interconnectedness then declines, however, after financial volatility has subsided. The study also finds

that banking exposures to crisis-affected advanced economies can trigger capital outflows across emerging economies. In

addition, a buildup in distressed assets risks financial contagion, with spillover effects on macroeconomic conditions.

Domestically, macroprudential policies such as countercyclical measures, capital and liquidity buffers, and balance sheet

instruments can reduce the procyclicality of financial systems.

Regionally, measures such as the Chiang Mai Initiative Multilateralization and associated regional macroeconomic surveillance

through the ASEAN+3 Macroeconomic Research Office are helping strengthen Asia’s financial safety net. Deepening local

currency bond markets, through the Asian Bond Markets Initiative, also contributes to the region’s financial stability and

resilience by lessening the region’s reliance on overseas borrowing for its long-term development.