Four Years On: Asia’s Lessons from 2008

As Asia emerged more quickly than the rest of the world from the 2008 financial crisis, bankers here focused on how to make their growth sustainable to withstand future such shocks. There was much talk about how to avoid complacency by local and regional players at the time, particularly given the high growth compared to the US and Europe.

There were calls – by both banks and regulators – for the banks to work with Asian overseers to ensure that ‘draconian’ regulations designed to fix western issues were not applied to the Asian system inappropriately. And there was a palpable sense that the emerging Asian economies and their banking systems in particular were increasingly decoupling from crises originating elsewhere and had the momentum to maintain growth without high levels of reliance on Western customers and investors.

Nearly four years on, are these discussions still relevant? What conclusions can we draw from the experience here in Asia since 2008? There are three factors in particular that should remain top of mind as we grapple with the uncertainty of today’s situation – factors that have made a difference (or threaten) Asia’s sustained growth, if not the health of the global financial industry.

Banks are Partners in the Growth Agenda – Not the Enemy

No review of the impact of the 2008 crisis – or any crisis to the financial system – would be complete without a word on regulation. Dr Ranee Jayamaha, banking advisor to the government of Sri Lanka, gave a succinct comment in 2010 on the subject that still holds true today: “The countries [that] suffered significantly from the recent crisis are aiming at capital enhancement and reduction in the size and complexities of their banks. For many emerging economies, the priority lies not in recapitalising banks or reducing leverage, but in continuing banking reforms and developing deeper capital markets to support future economic expansion.”

It would appear that regulators in Asia’s growth markets are generally heeding this common sense approach, and they must be encouraged by the industry to resist where possible extending regulations driven by considerations not relevant to these markets.

After all, in post-2008 Asia there seems to be even more agreement by public and private sector authorities that the financial industry enables economic development and growth of Asia. As a spokesperson from the Reserve Bank of India (RBI) said at a SWIFT event last year: “Payments systems are the drivers of economic growth… they help move funds faster when they are efficient and safe, which is directly linked to our economic growth.” This trusted role of Asian financial industry generally, even during the post-2008 turbulence, certainly should be preserved.

Regional and Local Institutions Provide Reach and Growth – and Strong Competition

Even before the 2008 crisis, the trend was seen of emerging economies driving world growth, and Standard Chartered predicts that 75% of real global growth from 2009-2015 will come from these markets.

The makeup of the banking industry is changing as a result, with a strong and growing class in Asia of regional and local players. Asian banks, in fact, are expected by the McKinsey Global Institute to reach annual revenue growth rates of around 10% over the next decade, which contrasts with around 5% for banks from mature markets. There are several drivers for their success, such as growing affluent populations, use of mobile technologies, policies designed to ‘bank the unbanked’, a preference of Asian consumers for local financial institutions, and expanding intra-regional trade by Asian corporates. Financial institutions who do not invest in the region for the medium to long term will find it only increasingly difficult to compete with the strong local knowledge and relationships of their Asian counterparts.

On the other hand, global institutions have a stake in the success of these regional players. Look at the area of anti-money laundering, where US banks need to consider Office of Foreign Assets Control (OFAC) lists for the large volume of US dollar traffic with their non-US counterparts, and therefore are concerned about compliance checks done by clients and correspondents outside of the US.

In Taiwan alone, 90% of financial traffic into the country is done in US dollar, as is 60% of outbound traffic (60% of which goes to the US). The Philippines sees similar numbers, with over 70% of its messaging traffic with the US and further important corridors with Germany, Singapore and the UK. This is just one area where risk and cost, starting at local level (KPMG reports that compliance costs have been rising at about 45% over the past three years), needs to be mitigated for the health of the overall system.

Strong Financial Infrastructure Required

At Sibos in 2010 in Amsterdam, experts addressing the topic of sustainable recovery in Asia agreed: a major obstacle to growth and the ability to withstand crises is fragmented and out-of-date infrastructure. Lisa Robins of Deutsche Bank explained that “you cannot approach the region seamlessly” given the many different languages, cultures and legal and regulatory systems. She and Alex Thursby of ANZ were emphatic that common standards and frameworks for clearing and settlement and governance were required across the region to provide the foundation upon which growth could continue.

In turbulent times, the need for scalable and standardised infrastructure remains key. They may not be the most exciting topics in the industry, but the institutions and practices that form the foundation of our industry are critical in times whether the markets are going up or down.

The Asian industry recognises this fact but more needs to be done. The People’s Bank of China (PBOC) took an important step forward when it adopted ISO 20022 standards for its core banking systems last year. As the renminbi (RMB) continues its rapid internationalisation, it makes the need foster domestic and international interoperability even more acute. India similarly is building a new real-time gross settlement (RTGS) system that is expected to go from 250,000 high-value messages a day to 2.5 million a day – within the first five years of operation. And if the ASEAN group is to realise its ambitions of an integrated economic community, standardisation and harmonisation of financial markets across these 10 countries is required.

During the 2008 crisis, the shared infrastructure, common standards and market practice within the European and US banking sector played a role to prevent a total collapse during record volumes and market uncertainty. Without such a backbone, no regional or domestic – or global – economy can expect to handle either the growth or the shocks that lay ahead. Europe and the US must safeguard their infrastructure and invest in its continued evolution as must other mature markets such as Australia and Japan. Asian emerging markets need to step up the attention they spend on financial infrastructure and move to taking concerted action to invest and build, particularly in the collaborative space where gains in efficiencies, cost reduction and transparency will be shared by the many and will positively impact the broader economies.

From the perspective of Asia, perhaps the biggest lesson learned in the wake of the 2008 financial crisis is one that was also learnt (and followed) after the 1999 meltdown: we cannot be complacent. There is still room for improvement on the part of our industry to do more in the collaborative space to build the infrastructure that reduces risk, lowers costs and supports sustained growth, with the goal that we will better recover from the crises of today and tomorrow and be able to fulfil the promise of the Asian century.

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