Friday, March 9, 2012

ASEAN Banks Operating Regionally Need Regional Regulation

According to Kyodo News, ASEAN central banks plan to set up an “ASEAN bank” system that would give designated banks the automatic right of establishment within the regional bloc.    The selected banks must be headquartered in ASEAN, fiscally sound and already operating within the region.  Once accepted, the bank regulatory authorities of all ASEAN member states would have to grant such banks the right to operate in their jurisdictions.    Kyodo reported that ASEAN central banks are working on a minimum standard for the ASEAN bank program, and that so far only three banks from Malaysia, Singapore and Thailand met the anticipated standard. The program will be discussed at the ASEAN central bankers’ meeting scheduled for March 26-29 in Phnom Penh.

This is another benefit arising from the long-delayed implementation of the ASEAN Comprehensive Investment Agreement (ACIA) on March 1.  Banks and other financial institutions now gain protections for their investments and operations under ACIA, which had not been available under the previous ASEAN investment agreements.  The development of Cambodia, Laos, Myanmar and Vietnam as attractive financial markets also motivate expansion into all of ASEAN, not just the ASEAN-6.

However, what is missing from the “ASEAN bank” program as discussed in the report is a regional compliance and enforcement system.  Those qualifying banks would remain subject to primary regulation by their home countries.  Banks such as CIMB and DBS in Malaysia and Singapore are already subject to high national standards, which is why the Kyodo News article mentions those countries and Thailand as being the first countries to qualify for the program.  Hence the issue in qualifying for the “ASEAN bank” program is not necessarily the structural integrity of the applying banks, but the reliability of the national bank regulatory systems in their home countries, as discussed in the Kyodo News report.

Beyond this, ASEAN central banks need to ensure that the qualifying banks are properly monitored and regulated on a regional level.  This does not necessarily require creation of an ASEAN central bank regulator.  Although this would be preferable, ASEAN’s preference to govern by committee motivates against creating a unitary authority.

Nevertheless, the rapid flow of funds means that banks can undergo great financial stress very quickly, as evidenced during the Asian financial crisis of the late 1990’s (or even beforehand, during the Barings collapse, triggered by rogue trader Nick Leeson in Singapore) and of course during the recent Lehman Brothers and Eurozone crises.   ASEAN should thus devote staff and resources to ensure that the central bankers have real-time information on the qualifying banks, and that they are sufficiently cooperative to take immediate action where necessary.  Otherwise, the consensus-driven governance by committee approach could operate and react slowly, laying the seeds for a future ASEAN version of the Lehman Brothers collapse.   

Fortunately, the ASEAN central banks have access to good people and resources in the Asian Development Bank and the ASEAN Secretariat. They just need more funds, people and resources to ensure that the “ASEAN bank” system operates well on an ongoing basis.