The vision of a new world order, in my view, has to include a changed global financial system, one that is tilted in favour of Asian banks with strong balance sheets and liquidity positions that are already making their way up the ranks of the world's biggest and strongest financial institutions.
No doubt the crisis has thrown the world's financial order into disarray and exposed the vulnerabilities of large US and European banks whose reputation and credit ratings have suffered as the markets they dominated in the past were turned upside down.
While the concerns over the US and European banking sector risk will take time to clear, the financial crisis has delivered a silver lining for banks in Asia. The fact that many Asian banks, especially those in developing Asia, have emerged intact is evidence of their resilience, a strength drawn from their conservatism and sound fundamentals. They are sticking to the basic principles of prudent banking practices with high capital and liquidity ratios, low leverage, solid funding, good asset quality and large reserves. Many of these virtues were acquired following the hard lessons learnt during the 1997-99 Asian financial crisis. The legacy of that is also seen in perceptibly stronger regulatory frameworks and banking supervision across Asia.
The ranking of the world's largest banks, measured by market capitalisation, has undergone a sea change over the years with Chinese banks, such as the Industrial and Commercial Bank of China, China Construction Bank and Bank of China, having edged out US and UK banks from the top of the league table.
Yet, we must be mindful that past fortune does not guarantee future success. This is particularly true given impending changes in the global financial system, such as those relating to Basel III and other regulatory changes being discussed and planned under different forums and international bodies like the Basel Committee, the Financial Stability Board and the G20.
While the exact nature and scope of the reforms and changes remain to be seen, Asian banks are likely to face a number of challenges and these have partly to do with the fact that their respective regulators have traditionally played an inactive role in the forming of global financial regulations. A major challenge relates to calls on regulators such as the UK's Financial Services Authority to impose tighter requirements relating to capital and liquidity ratios. Theoretically, these should not be a significant issue for Asian banks that are generally well capitalised and highly liquid. However, the devil is in the details; Asian banks would have to pay close attention to how different ratios relating to capital and liquidity are measured and the way that new global regulatory frameworks are incorporated locally.
Another challenge relates to the practice of subsidiarisation or ring-fencing of the international operations of banks. Stated benefits of subsidiarisation may be illusory in practice as it only helps resolution when dealing with a local bank with little international business. Subsidiarisation could potentially have the effect of limiting the cross-border expansion of banks and the effective deployment of capital and liquidity.
In addition, efforts to address the "too big to fail" problems may be disadvantageous for Asian banks. Logically, restrictions on size or concentration would run contrary to the efforts of many Asian banks that are trying to raise their level of efficiency and competitiveness through mergers and acquisitions.
Despite the challenges, the fact that Asian economies have come out of the crisis in fairly good shape presents Asian banks with a solid foundation to grow their business, not only on their home ground, but also in markets in the West as well as other developing regions. The strong balance sheets and liquidity positions of Asian banks should enable them to adapt quickly to new and potentially more stringent regulatory requirements, and to develop competitive advantages over rivals.
The crisis has also presented opportunities for Asia to deepen its financial systems, while avoiding the pitfalls that caught the West. Asian banks would need to strike a fine balance between efforts to deepen and strengthen their domestic financial markets and strides to expand their overseas operations. The region also needs to strike the right balance between the development of banking and non-banking/capital market finance.
Provided Asian banks and regulators are able to learn the right lessons from the crisis, stay on top of global regulatory changes and deftly adapt local frameworks to correspond with these, the coming years and decades are certain to be the golden era for Asian banks.
Jaspal Bindra is group executive director and Asia CEO at Standard Chartered Bank.
