Building Integrated Financial Markets 10 Years After the Crisis Jaseem Ahmed ADB

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Building Integrated Financial Markets 10 Years
After the CrisisJaseem AhmedADB
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Contents

• Impact of crisis on growth some salient
  features
• Building integrated financial markets basic
  elements and good practices
• Financial market structure
• Ownership of banks
• Infrastructure and incentive framework
• Unfinished agenda

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Summary of Key Findings and Issues Identified in
the Presentation

• Key findings of the presentation
• Recovery in the banking sectors of all the
  crisis-hit countries - improved CAR, NPLs, and
  loan to deposit ratios
• Changes in the market structure more NBFIs
• Banks have diversified financial products and
  services due to shifts in market demand and
  demographic profiles shift towards retail
  banking sector
• Improved regulatory and prudential supervision in
  Asian countries have put banks in a sound
  position
• Presentation identified key issues going forward
• Uneven pace of financial sector deepening in some
  Asian countries
• Unfinished agenda for bank regulation and
  prudential supervision
• Linked to financial sector deepening and the
  unfinished agenda is how to better manage risk in
  the financial system

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Salient Features Lost Inter-Generation Growth

• Five Crisis-hit countries per capita income
  growth paths have not recovered to pre-crisis
  levels
• Korea has recovered the most out of the five
  countries
• Expect growth trends to slow as economies become
  higher income economies (Korea)
• Fall investment to GDP rates explains part of the
  lower growth path
• Other key macro-economic indicators have improved
  over pre-crisis levels laying the basis for
  further growth

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Trends in per capita GDP have not recovered to
pre-crisis trends
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Emerging Asia Pre-Crisis Vs Post-Crisis
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A. Building Integrated Financial Markets 3
basic elements

• Financial system comprises of 3 parts
• Intermediaries - must function efficiently to
  mobilize resources and intertemporal allocation
  of risk
• Markets bring agents together and must function
  to price risk efficiently which is necessary for
  financial sector stability
• Infrastructure - regulatory framework,
  supervision, settlement, disclosure etc must be
  efficient to ensure the system is both resilient
  to shocks and promotes financial sector deepening

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B. Building Integrated Financial Markets Good
Practices

• 1. Financial market structure
• mix of institutions (banking and capital markets)
  is desirable
• contestability of banking sector critical
• 2. Ownership of banks
• dominance of private ownership over state
  ownership is important
• entry of foreign banks in developing countries
  shows mainly positive impacts
• 3. Incentive framework
• rules promoting good governance and supervision
• rules for promoting incentives for private sector
  monitoring of banks
• deposit insurance should be designed to minimize
  moral hazard
• Legal systems with sufficient protection of debt
  and equity holders
• Investors have incentives to efficiently price
  risk
• Efficient infrastructure - trading, settlement,
  custody and delivery mechanisms

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I. Financial Market Structure and Performance

• Mix of institutions - Two tier systems have
  emerged within Asia
• Some countries financial systems are deepening
  (more liquid, sophisticated, sounder and more
  resilient) Korea, Hong Kong, Singapore,
  Australia and New Zealand
• Several countries financial systems are slower
  to evolve India, Indonesia, Philippines and
  Thailand
• For example, with corporate bond market
  accounting for 40 of GDP in emerging markets
  (compared to 140 in developed countries)
  indicates substantial growth potential
• Banking assets dominate financial sector assets
  in Indonesia, India, Philippines and China (range
  of 40 to 70), while capital and bond markets
  dominate in Japan, Malaysia, Singapore, Korea
• Drivers for evolution differences in stage of
  development, and also regulatory environment
  conducive to this evolution

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Financial Sector Development a two tier system

• Financial assets as share of GDP

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But financial sector assets have grown rapidly
across AsiaFinancial assets of GDP
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Financial Sector meeting increasingly diverse
and sophisticated financial needs

• Growth of NBFIs as source of corporate financing
  insurance, pensions, mutual funds
• Expansion of more sophisticated financial
  services to corporations and banks (e.g., credit
  and insurance derivatives)
• Expansion of financial services to individuals
• Banks increasing focus on retail banking and
  providing non-traditional products (insurance,
  pension funds)
• Individuals financial assets portfolios
  diversifying bonds, trusts, pensions, insurance

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Banking sector performance has improved

• CAR ratios recovered
• NPLs declined
• Loan deposit ratio improved
• Banking sector return on equity restored to
  pre-crisis levels

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Banking sector health has improved post-crisis..

• CAR ratio recovered

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Indicators of banking sector health contd

• NPLs have declined

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Indicators of banking sector health contd

• Loan to Deposit Ratios are Recovering but Remain
  at Half the Pre-Crisis Level

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Indicators of banking sector health contd

• Return on equity improved

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II. Ownership

• Market driven banking consolidation since the
  crisis
• Increase in private ownership in many of the
  Asian economies
• Number of countries seen increase in foreign
  entry Indonesia.

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Share of state ownership remains high in several
Asian economies

• Share of SOCBs in total bank assets

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Foreign Ownership in Banking Systems increasing
in Indonesia

• Share of Foreign-owned Banks in total bank assets

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III. Infrastructure and incentive framework

• Market driven banking consolidation supplemented
  by Government strategies many countries
  adopting Financial Sector Master Plans (FSMP) to
  facilitate further developments
• Other reforms covered
• Review of prudential regulations in all countries
  
• Separation and independence of central banks
• Improvement in incentive framework including
  corporate governance and disclosure external
  auditing, (only Malaysia has mandated rating by
  international agencies)
• Relaxation of foreign entry into banking system
• Some countries established deposit insurance
• Improvements in payments system

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Areas of Reforms in Supervisory Practices in
ASEAN since 1997
Source Lindgren, Carl-Johan (May 2006), Banking
Integration in the ASEAN- Region An Overview,
ADB Manila Philippines. Table based on
questionnaires and central bank websites and
annual reports.
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Areas of Regulatory Reforms in ASEAN since 1997
Areas of Regulatory Reforms in ASEAN since 1997
Areas of Regulatory Reforms in ASEAN since 1997
Areas of Regulatory Reforms in ASEAN since 1997
Source Lindgren, Carl-Johan (May 2006), Banking
Integration in the ASEAN- Region An Overview,
ADB Manila Philippines. Table based on
questionnaires and central bank websites and
annual reports.
Source Lindgren, Carl-Johan (May 2006), Banking
Integration in the ASEAN- Region An Overview,
ADB Manila Philippines. Table based on
questionnaires and central bank websites and
annual reports.
Source Lindgren, Carl-Johan (May 2006), Banking
Integration in the ASEAN- Region An Overview,
ADB Manila Philippines. Table based on
questionnaires and central bank websites and
annual reports.
Source Lindgren, Carl-Johan (May 2006), Banking
Integration in the ASEAN- Region An Overview,
ADB Manila Philippines. Table based on
questionnaires and central bank websites and
annual reports.
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Unfinished Agenda

• Governance especially in State Banks remain weak
• Bank supervision and monitoring has improved but
  gaps remain little incentive for private
  monitoring
• Non-bank financial markets remain small and
  fragmented in most countries (most notably
  Indonesia and the Philippines) need to continue
  facilitate improvement in trading, payments, and
  settlement systems infrastructure to reduce
  operational risks, develop bond market through
  regulatory framework for protection of debt
  holders develop secondary market for government
  bonds
• With the exception of South Korea and a few other
  emerging markets in Asia, less attention has been
  placed on developing capital markets and allowing
  financial sectors to use risk management products
  to diversify risks and promote stability in the
  domestic financial sector hedge funds,
  derivatives etc
• These markets have been developing at high speed
  for example aggregate capital if hedge funds
  from 30 billion in 1990 to 1.3 trillion in
  2005)
• At the same time knowledge and practices of
  regulatory and supervisory authorities will need
  to keep up with these developments essentially
  to have as much oversight as necessary but not
  more!
• Need crisis prevention and resolution methods
  that work with the grain of the market and not
  against the grain

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Agenda

• Strengthen financial sector
• Improve governance in state banks and continue
  with privatization of remaining state banks
• Enabling environment for private monitoring
  (rating by international agencies external
  auditing greater disclosure and quality of
  disclosed accounts)

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Agenda

• Diversify the financial sector and increase its
  depth
• Improve capital markets
• Strengthen securities commissions so they can
  implement and enforce rules and regulations to
  increase disclosure requirements and to protect
  minority shareholders
• Governments continue to facilitate improvement in
  trading, payments, and settlement systems
  infrastructure to reduce operational risks
• Bond markets are small facilitate development
  of this market through regulatory framework for
  protection of debt holders develop secondary
  market for government bonds (promote adoption of
  standardized repurchase agreements etc)

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Agenda

• Strengthen institutional investors
• Pensions, life insurance and mutual funds small
  and under-developed account for less than 30
  of financial sector assets
• Key focus should be on improvement of regulatory
  and supervisory schemes and governance
• iii. Strengthen supervision of nonbank sector

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Agenda

• Better managing risk
• Strengthening investor base and improving
  regulation and consistency of treatment of
  institutional, foreign and other investors -
  open to foreign investors, mutual funds and risk
  management products such as derivatives
• Capital controls and exchange rate controls
  inhibiting capital market development and without
  a developed capital market, investors will not be
  able to efficiently price risk necessary for
  ensuring financial sector stability
• A key financial market instrument is developing
  financial derivatives such as repos and swaps, as
  well as asset backed securities markets,
  improving access by foreigners to domestic
  hedging services. This must be backed by suitable
  regulation of equity derivatives markets, as well
  as increased market surveillance and improved
  risk management at the firm level

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Conclusion

• Financial markets are better integrated
• Health of the banking sectors have improved
  substantially
• Intermediation of the financial sectors are
  stronger
• But there is an unfinished agenda
• Governance in state banks weak in a number of
  Asian countries
• Continue to improve supervision and monitoring
  especially private sector monitoring
• Promote further diversifying of the financial
  sector
• Better managing risks
• A key issue is how to widen availability of
  financial instruments, expand the investor base,
  and better manage risk
• Should focus on opening to foreign participation
  and new products such as hedge funds and
  derivatives - will help to improve liquidity,
  transfer risk, and reduce inefficiencies
• Need to be backed up with appropriate regulations
  than do not inhibit its development but focuses
  on prevention and resolution methods (eventually
  removing capital and exchange rate controls).