Looking at the opportunities for banking in the region, it’s clear that the relocation of the world’s economic growth to Asia is being matched by a shift in the centre of gravity for banking and financial services.
I see three key opportunities: the accumulation of wealth in Asia, the use of the region’s surplus liquidity and the internationalisation of the renminbi.
As per capita incomes rise in Asia, the region will accumulate wealth at nearly twice the global rate. Overall, Asia will increase its share of global wealth to almost 20% in 2014. This will continue to expand and will be a source of funding for investment in productive assets such as corporate research and development, and infrastructure — creating a virtuous circle of productive investment that will grow wealth that will continue to invest.
That brings me to the second opportunity: putting Asia’s surplus liquidity to good use. Asia’s high savings rates are important to financial sector stability in Asia — and they are an attractive part of the banking opportunity. Many Asian banking systems have loan-to-deposit ratios of less than 70%, which means there is a low level of systemic risk in the region.
However, strong liquidity also means it can be a challenge to find high-yielding investments. As a regional bank, we’re using our network and connectivity to deploy these deep pools of liquidity across borders.
Third, the cross-border trade in renminbi and the growth of the offshore bond market out of Hong Kong have been astounding.
The implications of the renminbi’s eventual transition to full convertibility are enormous: it will help Chinese households invest their savings at home and abroad; it will lead to the further development of China’s domestic capital markets through Shanghai, which will become large and deep; there will be a continuation of the flow of renminbi out of China into Hong Kong, building out liquidity and looking for assets; and the renminbi will replace the US dollar as the currency of trade in Asia.
Too much of a good thing
Now let’s look at the three challenges. As a banker, I can’t talk about the opportunities liquidity presents without discussing the risks. The trouble with excess liquidity is that you have to manage it.
Stimulus policies in Asia and the US have driven a massive surge in liquidity in Asia, contributing to inflationary pressure and higher asset prices. However, we do see that Asian policymakers are getting focused on inflation.
The Singapore dollar, Indonesian rupiah and Chinese renminbi have all been allowed to appreciate significantly to levels against the US dollar that have not been seen in years.
On balance, I am optimistic for Asia and my view is that there will be a soft landing in China and in the rest of our region. But we must avoid the problems that the US and Europe created for themselves. While Asia does not have a high gearing, we need to be careful of bubbles forming in traditional asset classes such as real estate, and untraditional asset classes like commodities.
The second major challenge is competition for banking talent. With European and American banks returning and regional banks expanding, competition for banking talent has intensified across the board. Turnover is becoming an increasing problem and manifests itself in the lack of broad-based generalist bankers with real experience who can see the full picture, understand the risks of leverage and are inherently conservative.
This is a real problem, and without bankers with this type of experience, Asia risks eventually going down the same route as Europe and the US.
If it ain’t broke...
The third major challenge for banking in Asia is the overhaul of the global banking rules and regulations in response to the financial crisis — particularly through Basel III.
The new regulatory environment is a response to the way banks in the US and Europe were managing their balance sheets in both liquidity and counter-party risk. They had high degree of leverage and a mismatch in their liability and asset portfolio that was, frankly, not sustainable. In Asia, this is not a problem.
Banks, corporates and governments learned valuable lessons in the Asian financial crisis. As a result of that experience, Asia has a lot more systemic liquidity, banks are far less leveraged with low loan-to-deposit ratios and there are low levels of sovereign and private-sector debt. Many of Asia’s banks already meet or exceed the Basel III capital requirements.
The experts in New York and London don’t seem to have understood the extent of reform that has already been accomplished in Asia. The response of US and European regulators to the financial crisis is to ring-fence liquidity and keep it within national boundaries, which reduces the leverage that banks can hold in their balance sheet.
But host country ring-fencing could also have a number of unforeseen consequences in Asia. It imposes costs on banks that will be passed on to customers and increase barriers to entry for foreign banks. With fewer foreign banks, the influence of large local banks would increase the risk posed by “systemically important financial institutions” and reduce the ability of Asia’s capital markets to circulate liquidity throughout the region, with the greatest impact felt in Asia’s large financial centres — Hong Kong and Singapore.
All this begs the question, why re-regulate a system that is working? Rather than more regulation, the real challenge is better supervision and enforcement in the US and Europe. But, unfortunately, I am concerned that we are stopping liquidity moving to those who need it and are creditworthy, from those who have it and are prepared to take appropriate risk.
This fundamentally doesn’t play well with me.
I believe that if you look forward 10 years, the world will be left with only two or three truly global banks, you will see the emergence of eight or nine Asian regional banks that have a strong domestic base and the rest of the banking system will consist of powerful domestic players.
The bottom line is that if you’re a bank looking for growth — Asia is the place to be.
This is an edited version of the speech Alex Thursby delivered yesterday at an Institute of International Finance luncheon seminar held during the ADB’s annual meeting in Hanoi