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Print Edition> Business
UPDATED: May 21, 2010 NO. 21 MAY 27, 2010
Asian Banks: Leading the Way to Recovery



The global financial crisis has rocked the American and European Union banking system leaving many Western banks teetering on the verge of bankruptcy. But in the East, Asian banks have fared well so far. But what's the secret to their success in riding out the crisis? Karen Fawcett, Group Head of Transaction Banking of Standard Chartered Bank, gave her answers in the following article with Beijing Review. Edited excerpts follow:

Many predicted that Asia would topple as the contagion of the recent crisis spread from the West. However, rather than behaving like dominoes, this crisis has shown Asia's emerging market economies to more closely resemble dynamos—able to generate self-sustained, domestically driven demand. Given this, Asia is now seen as the growth center of the world.

Previous lessons


BETTER THAN BEFORE: The Bank of China (Hong Kong) Ltd.'s building stands tall in Hong Kong. Asian banks, having survived the 1997-98 crisis, are not as vulnerable to crises as before (DUAN ZHUOLI)  

When asked why Asia has fared so well, we feel compelled to provide a lesson from the history books. A financial crisis of this magnitude is not completely new to this region, of course, and the Asian crisis of 1997-98 stands out as a watershed event. At that time, Asia had experienced two decades of very strong economic growth that had fuelled lax lending and careless investment practices. When foreign investments (which until then were huge) slowed and governments became unable to support their currencies, the region began to witness a major meltdown.

Asia's success in riding out the storm this time is no accident. It is clear that Asia learned a number of crucial lessons from the depth and severity of the crisis in the late 1990s. Since then, Asia has been preparing itself to withstand future crises. So while other regions were caught woefully unprepared, Asia was leaner, meaner, and more ready to absorb the shock.

Foreign exchange reserves, for instance, have surged across the region since 1997 and there is a far greater emphasis on fiscal discipline, as well as on the credibility of monetary policy. More importantly, the previous crisis reduced the level of indebtedness built up within Asian economies. This proved key to ensuring that the debt-induced crisis in the West did not spread eastward.

Another lesson from the 1997-98 crisis was that countries need to deregulate their financial sector at speeds best suited to domestic needs. Prior to 1997, some Asian economies had deregulated too quickly, allowing bubbles to build up. Without the appropriate institutional infrastructure, this was disastrous. But the onset of the more recent crisis demonstrated that Asian economies had emerged from the 1997-98 crisis with more robust regulatory environments.

Reaping the rewards

Perhaps the most overlooked, but no less important, feature of the strong Asian response to the crisis was the position of local banks compared to their counterparts in the West. In Asia, we have simply not witnessed the expected deterioration in banking profitability.

In 2008, for example, total Asian banking profit was 27 percent higher than the total of global banking profit (many banks worldwide made losses, which lowered this total). That is despite representing only 14 percent of global assets. By contrast, Europe—which boasts the majority of banking assets—experienced losses that were the equivalent of 14 percent of global banking profits. In the United States, the banking sector has been the worst hit, with losses equivalent to 80 percent of global profits, despite having 20 percent of equity in the global market.

These figures, while representing a mere snapshot of what occurred in the recent crisis, are a key piece of the puzzle when you consider what happened in the 1990s versus what has happened in the developed world this time around. It is clear Asian banks are performing impressively. During the 1997-98 crisis, we saw many foreign banks pull out, leaving local companies short of credit as local banks (which were also suffering) failed to step up and meet local demand. This time around, an entirely different picture has emerged in Asia. Local banks have had much stronger balance sheets and have shown far stronger support for local companies.

As such, they now dominate their domestic markets. China's banking sector has been particularly successful in moving onwards and upwards—stock market listings, strategic stakes taken by international banks and stellar growth. Indeed, Chinese banks have emerged as among the most profitable in the world.

Acting local is key

While opportunities abound, there are also huge implications for banks. As soon as companies start producing for the local market, their banking needs change dramatically. Initially, when corporate operations are limited to factories producing for export, they are often satisfied with basic lending and, in general, cross-border transactional services with a focus on basic cash, trade finance and foreign exchange. As corporate operations become more local, domestic transactional services are required with full local currency capabilities—plus more value-added services as the corporation begins to hedge, fund and structure their business at a local rather than international level.

"Acting local" is easier said than done and while some may argue regional banks are in a more difficult position than the "mega banks" because of fewer resources, just as important as size I would argue would be the number of branches and the level of local integration. This is especially true given the challenges that include dynamic regulatory changes and their implications, disparate systems, language and local operating requirements.

What's more important is whether you have the capabilities and willingness to build a domestic business on the ground that will rival the skills of the local Asian banks. To be successful, banks must tailor their approach to these local needs while simultaneously providing consistency across multiple small markets. This has had big implications for the way we run our business with global product teams on the ground in Asia and managing standardized platforms with multi-language systems across all markets.

The local banking sector is now strongly placed to play an integral part in Asia's future growth. As the global economy looks toward recovery and new engines of growth, we are at an important juncture in the development of the Asian economy and the Asian banking sector in particular. If banks can get their act together and step up to meet increasing market demands and be flexible to adapt to changing corporate needs, the future will be a very profitable one indeed.


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