Economics and finance | Australia, Asia, East Asia, South Asia, Southeast Asia, The Pacific

8 December 2015

Asia’s savings used to flow to New York and London before they came back to the region, but the Global Financial Crisis changed all of that, as Eli Remolona and Ilhyock Shim report.

Much of Asia’s savings used to flow to New York and London before they were sent back to Asia. This is no longer the case.

In the years before the Great Financial Crisis (GFC) of 2008-09, global banks recycled Asian savings to provide dollar funding to Asia. European banks played an especially large part. On the eve of the crisis, Euro area banks accounted for about a third of the international lending to emerging Asia. Banks from within the region accounted for a similar share.

The Asia-Pacific region weathered the GFC well but it did not escape it entirely. The flow of dollars stopped but the halt was only temporary; the flow resumed with a vengeance in 2009. International claims on the region more than doubled in five years. China stood out, with its cross-border borrowing growing almost sixfold from 2008 to 2014.

This resurgence of cross-border lending saw a new set of players take on the leading roles. In the wake of the crisis and amid sovereign debt problems in Europe, Euro area banks’ cross-border activity fell off. As a result, they failed to keep up with the Asia-Pacific region’s growing demand for dollars. By 2014, their share in international claims on emerging Asia was down to 14 per cent, less than half their 2007 share, although the absolute level of their claims was essentially unchanged. The banks that stepped in were largely from Asia and the Pacific, and their share rose from 31 per cent to 57 per cent.

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Amid all this, Singapore found itself playing a different role as a banking centre. Prior to 2008, Singapore’s banks tended to borrow from emerging economies in Asia and to lend the funds either domestically or to borrowers outside of Asia. The crisis turned this pattern around. In the past few years, Singapore’s banks became net borrowers from advanced economies and net lenders to emerging economies in Asia. Not to be outdone, banks in Hong Kong also became bigger net lenders to emerging Asia, while reducing their net lending outside the region.

The intraregional trend seems likely to be sustained. Reinforcing this is the fact that member governments of the Association of Southeast Asian Nations (ASEAN) have recently adopted a regional banking integration framework. This will soon allow banks qualified in one jurisdiction to operate freely in other member jurisdictions.

In many respects, the ASEAN members are following in Europe’s footsteps. One lesson from banking integration in Europe is that the “single passport” should have been accompanied by effective area-wide banking supervision. Another lesson is the importance of having in place a sound framework for dealing with troubled banks with international operations.

Whether at the global or regional level, banking integration involves benefits and risks. Benefits include greater competition and enhanced efficiency, availability of a wider range of banking services and greater risk-sharing. In Asia, regional integration poses three potential sources of risks. The first is the growing systemic importance of regional banks, both as common and concentrated lenders within the region. The second is liquidity risk in foreign currency funding associated with the funding models of Asia-Pacific banks. The third is the increasing share of short-term foreign currency lending to the Asia-Pacific region by regional banks.

One lesson of the 1997 Asian financial crisis is that a mismatch between the maturity of foreign borrowing and that of lending can be an important source of risk. These days Asia-Pacific banks typically borrow in US dollars and lend the dollars to various firms in the region. Since the crisis, however, they have shown a tendency to lend these dollars in the form of short-term loans. The more they dominate cross-border lending in the region, the more short-term the lending becomes.

The central banks and supervisory authorities in the Asia-Pacific region are aware of the challenges they face with the rise of regional banking. Many jurisdictions have already implemented regulatory measures to mitigate the systemic risks stemming from cross-border banking activity and from large foreign affiliates. They have also started to monitor regionally active banks more closely.

Nonetheless, achieving effective cooperation and coordination between home and host jurisdictions in dealing with cross-border banking issues continues to be a difficult task.

This is an abbreviated, non-technical version of a paper by the same authors, entitled “The rise of regional banking in Asia and the Pacific”, in the BIS Quarterly Review, September 2015.

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