Carolyn Blacklock has lived and worked throughout Asia Pacific for over 20 years and lived in PNG for the past 10 years. Ms. Blacklock has experience working with World Bank Group and various government entities. In the following article, Carolyn Blacklock discusses the rise of regional banking in the Pacific, and how regional banking came to be in the area.
Before the Great Financial Crisis of 2007 to 2009, Asia’s savings found their way to London and New York before flooding back to the region. European banks played a key role in providing funding to Asia, accounting for roughly one third of international lending to the region. However, things have changed drastically since then.
Carolyn Blacklock explains that the worldwide cross-border banking boom between 2001 and 2007 saw dollars travel from the US to Europe to Asia-Pacific back to the US. However, the crisis caused European banks to hold back while Asia-Pacific banks pushed forward, meaning that the bulk of the intermediation is performed within the area. Hence, the subsequent rise of regional banking.
Experts Predict the Trend Will Continue
Industry professionals state that the intraregional trend appears likely to continue sustaining itself, especially after the governments included in the Association of Southeast Asian Nations (ASEAN) created and implemented a regional banking integration framework. This cut European banks’ share in international claims on Asia down to a mere 14%, while banks in the Asia and Pacific locations grew their share from 31% to 57%.
Carolyn Blacklock says that this implementation means banks in one member jurisdiction can now operate in other locations freely. This large regional banking rise allows the area to gain efficiency while simultaneously broadening channels of intraregional contagion.
The Evolving Role of Banks in Singapore and Hong Kong SAR
Carolyn Blacklock reports that, before the 2008 crisis, Singapore banks borrowed an average of $107 billion per month from emerging areas in Asia, lending them to domestic borrowers or those outside Asia. Since the shift, however, Singapore banks borrowed from advanced economies and lent the majority of such funds to Asia, boasting a lending average of $163 billion per month.
Financial institutions in Hong Kong SAR also became larger net lenders in the Asia-Pacific region throughout this same timeframe. Meanwhile, they also reduced net lending from outside the region.
Carolyn Blacklock notes that this more prominent role of within-region banks has caused an even larger use of short-term lending than experienced prior to the Great Financial Crisis.
The shift aligned with a more potent concentration in creditor banking systems. From the end of 2007 to the beginning of 2015, the market share of the top three creditor countries rose, being most pronounced in New Zealand, Thailand, Indonesia, Malaysia, Korea, and the Philippines.
Carolyn Blacklock explains that three of the five largest creditors in the initial quarter of 2015 consisted of three economies from the region — Japan, Australia, and Singapore.
Understanding the ASEAN Banking Integration Framework
Carolyn Blacklock says that once the rise of regional banking within the Pacific gained traction, the aforementioned ASEAN Banking Integration Framework (ABIF) was adopted to achieve free-flowing financial services within the ASEAN regional banking sector.
To align with the framework, involved countries implemented the Qualified ASEAN Banks (QABs) scheme (i.e., banks in one jurisdiction can operate freely in others). Such banks also receive equal treatment to those that are primarily based in the jurisdiction.
The protocol also outlined two stages to account for members’ levels of readiness. The first was a multilateral stage, which established ASEAN-wide guidelines. The second was a bilateral stage which included negotiations between countries regarding the permittance of QABs.
With this in mind, Carolyn Blacklock points out how it is evident that ASEAN members are largely following in European banks’ footsteps — those involved with the European Economic Area (EEA) agreed to mutually recognize their supervisory frameworks back in 1992.
Perhaps one of the primary lessons that Asia-Pacific regional banking has taken from the EEA is that area-wide supervision is necessary in order to ensure trust. According to experts, similar trust issues are likely to arise with the ASEAN efforts as participants pave the way to fully integrated QABs.
Financial Stability Issues Exist in Regional Banking Too
Carolyn Blacklock reports that both global and regional banking integrations present both benefits and risks.
The benefits for the Asia-Pacific region include greater competition, boosted efficiency, wider risk-sharing, and the availability of increased banking services. However, the potential downsides are not to be ignored.
Shim and Remolona see a few potential risk sources with the implementation — the growing importance of foreign banks, liquidity risk in foreign currency funding, and the shortened maturity of foreign loans.
Carolyn Blacklock says that, thankfully, certain provided strategies are being put into action to minimize these potential risks so that intraregional banking’s benefits can prevail in the area.