Teresa Curran

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Aftermath of the Asian Financial Crisis
Conference of State Bank SupervisorsJune 1, 2007

• Teresa Curran
• Group Vice President
• Federal Reserve Bank of San Francisco

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Aftermath of the Asian Financial Crisis

• Reflecting on the Asian Financial Crisis
• Looking Forward
• China

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Reflecting on the 1997-98 financial crisis
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Bank credit to the private sector
(percent of GDP)
Source World Bank, International Monetary Fund
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Underdeveloped Corporate Bond Market
Ratio of Corporate Bonds to Loans () in 1996
Source BIS, FRBSF calculations
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What went wrong?
Shaky Pillars
Internal Controls, governance and transparency
Sound financial practices
Ability to identify and manage risk
Enabling operating environment
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What went wrong?
Sound financial practices
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Pillar I Sound Financial Practices Non-performi
ng loans for key countries
NPLs to Total Loans () at Peak in 1997-98
Source Various Central Banks
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Shaky Pillars
Ability to identify and manage risk
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Poor asset liability management
Short-Term External Debt / Foreign Exchange
Reserves
Source ADB
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Shaky Pillars
Internal controls, governance and transparency
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Pillar III Internal Controls, Governance
Transparency

• Auditors
• Board of Directors
• Independent credit administration
• Accounting standards
• Financial disclosure

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Shaky Pillars
Enabling operating environment
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Pillar IV Enabling Environment

• Supervision and regulation
• Credit bureau and agencies
• Bankruptcy laws and court system
• Safety net
• Good financial reporting

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Significant progress has been made since 1997
Looking Forward

• Stronger balance sheets
• Prudential regulations stronger supervision
• Industry consolidation restructuring
• New markets products

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Performance Indicators for Key Countries
Capital Adequacy Ratio ()
NPLs to Total Loans ()


Source Various Central Banks
Indonesia and Korea figures as of 6/30/06
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Looking forward
but challenges remain

• Complacency
• Risk management
• Retaining skilled staff
• Responding to competition

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Korea Vs. South East Asia
NPLs to Total Loans () as of 12/31/06
Indonesia and Korea figures as of 6/30/06
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Issues On the Horizon

• Basel II implementation
• Bank consolidation
• Appearance of anti-foreign sentiment

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What about China?
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Chinas banking reforms
Improving banking sector

• Nonperforming loans at historically low levels
• Capital levels have improved due to injection of
  capital through IPOs and strategic investments by
  foreign banks
• Stronger regulations
• Improved supervision

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Chinas banking reforms
Recent IPOs and Strategic Investors
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mask underlying problems
Chinas banking reforms

• Weak corporate governance
• Interference of party officials
• Skilled staff retention
• Concentrated lending to state-owned enterprises
• Management of rapid loan growth

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Conclusion

• The Asian financial crisis had a profound effect
  on the people and the economies of the region.
• Asian banking sectors repaired and stronger.
  Issues remain, but banks are in a good position
  to withstand pressure.
• Challenges are structural and strategic.

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• www.frbsf.org/banking/asiasource/events/afcseries.
  html
• June 20 and 21, 2007, in San Francisco.
• Trends in Asian Financial Sectors, the first
  conference in our Asian Financial Crisis series.
  Featured speakers include
• Tim Geithner, President of the Federal Reserve
  Bank of New York,
• Eisuke Sakakibara, former Japanese Vice Minister
  of Finance and Professor, Waseda University,
• Anne Krueger, Special Advisor to the Managing
  Director and former First Deputy Managing
  Director, IMF,
• Robert Zoellick, Vice Chairman, International,
  Goldman, Sachs Co., former Deputy Secretary of
  State.
• September 6 and 7, in San Francisco.
• Asian Banking Challenges and Opportunities, the
  final conference in our Asian Financial Crisis
  series. Featured speakers include
• Dominic Barton, Chairman of McKinsey Co. Asia,
  
• Andrew Crockett, President of JPMorgan Chase
  International,
• Tarisa Watanagase, Governor, Bank of Thailand