United States investment bank Salomon Smith Barney has called on ailing Asian economies to pass responsibility for supervising international capital flows to Group of Seven (G7) leading industrialised nations' financial regulators. Global head of sovereign research Stephen Taran said regulatory authorities in Asia lacked the expertise and 'institutional capacity' to effectively monitor flows into and out of the region. Countries in the region would also be preoccupied with the recovery of their economies, hampering efforts to accurately record capital movements. The rapid and unregulated flow of funds has been blamed for deepening the regional crisis and has become a source of prime concern for international bodies such as the World Bank and International Monetary Fund. Mr Taran believed G7 regulators had a greater institutional capacity to control international fund flows. In October G7 leaders proposed reforms to strengthen the global financial infrastructure, including enhanced hedge fund regulation. Governments should not seek to regulate hedge funds directly as this was not a feasible way of preventing the region from slipping into crisis again, Mr Taran told the Asia Pacific Issuers and Investors Forum, organised by Euromoney , yesterday. Instead, regulators should monitor lending institutions which provided leverage to hedge funds. Asian regulators should improve their capacity to monitor international fund flows from the demand side by preventing Asian corporates from leveraging themselves excessively. Mr Taran said prospects of an export-led recovery for the region appeared weak because of shrinking demand in leading export markets, the United States and Europe, whose economies were also slowing. He saw better prospects for Asia to reflate itself by increasing its access to external liquidity, which should help boost domestic demand without sacrificing hard-won currency stability. Mr Taran said external liquidity should help distressed Asia build reserves, which in an export-led recovery would be replenished by current account surpluses. By doing so, Asian countries could boost domestic demand for goods originally produced for export. Mr Taran said as global investors' appetite for Asian corporate credits was limited because of the cloud surrounding the region's economic reform, government borrowing should play a more important role. Official borrowings tended to be less risk-reward sensitive compared with commercial borrowing, allowing borrowing costs to stay lower. Lending by multinational agencies such as the International Monetary Fund or Asian Development Bank would also give greater comfort to private creditors.