Prasarn Trairatvorakul: Financial crises and the future of global and
Asian banking
Statement by Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, at the Sasin
Bangkok Forum 2012 Plenary Session "Financial Crises and The Future of Global and Asian
Banking", Bangkok, 9 July 2012.
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Theme: "Strategy for Known-Unknown". The critical success factors are 3 Cs:
Coordination of regulators, Commitment forged by Inclusiveness, and Communal
responsibility to restore market mechanism as a pillar of governance and financial
discipline.
Good morning. It is an honor to join all of you today. I would like to thank Sasin for
organizing this forum and for inviting me. Over the past three decades, Sasin has played
an important role in grooming business and policy leaders who have been instrumental
in building Thailand's open and competitive economy. Today, we are facing another critical
juncture for Thailand and the global economy. This forum has brought together the world's
leaders in public policy, businesses, as well as academia, and is therefore a rare
opportunity for dialogue on our strategy going forward.
Ladies and gentlemen,
This brings me to the topic of my remark today. The future of banking industry at the global
level and in Asia is being shaped by three major forces, namely, the fragile global
economy, global financial regulatory reforms, and the rise of Asia which faces its own
developmental challenges. These forces are interrelated and complex, no one can claim to
fully understand the final outcome. So is this the new paradigm of known-unknown? That
is, we know what the major drivers of change are, but we cannot forecast outcome. So
the key strategic challenge is how to deal with Known-Unknown.
For the short-term, the key priority is dealing with the fragile and volatile global
economy. Stability is the priority for banks and regulators. The strategic policy
question is how to get the right balance between risk and return, stability and growth.
Weaker banks will retrench, leaving rooms for the few stronger banks to take up market
share. In Asia, we have seen banks from the Asia-Pacific, notably Japanese, Chinese, and
Australian banks moved into market space where European and U.S. banks have
retracted. ASEAN banks are also shifting strategy to play a greater role to support their
conglomerates in the regional expansion. If this regional banking trend continues, what are
the implications for banks, regulators, and central banks? While the region has so far
remained relatively resilient to the first round impact of European bank deleveraging,
there is significant concern about the second round impact through the slowdown in global
trade and economy that will impact growth.
Another known-unknown in the short-term is the impact of interaction of various
traditional and non-traditional policy measures, such as monetary policy, prudential
policy including macroprudential. As a result of this crisis, the acceptable policy space
has been significantly widened, for example, macroprudential policy now includes sectoral
measures such as those to prevent property bubbles or to control adverse impact of
capital flows. While these measures have merits in safeguarding financial stability, they
could have complex and cross-border impact.
Even on the monetary policy front, unconventional measures are becoming more
conventional. Central banks in the major economies have increasingly used
unconventional monetary easing. Though necessary to stabilize their economies at this
juncture, these policies have side effects of large and volatile capital inflows into Asia. This
further complicates safeguarding of financial stability in other countries including Asia, and
could, in turn, trigger some countries to resort to macroprudential measures themselves.
Thus, in terms of policy space, we are dealing with a new paradigm of expanded policy
tools, with new transmission mechanism, and requiring their own policy framework and
governance. So we need to recognize the need for cross-border coordination as well
as flexibility in execution given emerging uncertainty.
Turning to the more medium-term structural issues, major regulatory reforms
especially Basel III, Financial Stability Board reforms, and Dodd-Frank Act are still a
known-unknown. We do know that they are designed to redress weaknesses that
caused the crisis by enhancing capital and liquidity, while addressing the problems of
procyclicality, and too-big-to-fail of SIFIs. For this, their merits are well recognized. But
these reforms will reshape the global financial landscape and raise cost of financial
intermediation. They will also have implications for cross-border level playing field,
regulatory arbitrage, and alter risk profile of banks. Therefore, we need to recognize the
unknown element, that is, we don't know their full impact on the financial market and global
economy.
The latest review of the Financial Stability Board of potential unintended
Emerging markets
consequences of regulatory reforms pointed to these concerns.
have raised some concerns about the Basel III capital and liquidity frameworks. These
may have negative impact on domestic financial markets, increase banks' cost, and
thus reduce credit and financial market liquidity. In particular, the liquidity standard, which
is not yet finalized, the calculation in the framework may not accurately reflect emerging
market's financial market, and the implementation could distort local financial market.
There have also been concerns about the treatment of traditionally low-risk trade finance
in leverage ratio which may impact growth and development. Emerging Asia is
predominantly bank-based; thus, Basel III will affect its financial intermediation relatively
more than in the West, just at the time when financial intermediation is critical to support
economic development and integration. Some of these standards are still under discussion,
and thus Asia-Pacific region already has a proactive regional strategy to help steer these
regulatory reforms, such as through EMEAP forum, to reflect our economic and
financial market context.
With regard to the which aims to move OTC derivatives trading on
OTC derivatives reform
to exchanges and cleared through central counterparties. There are concerns regarding
inconsistency of regulation between countries, infrastructure that is needed, and cost for
users. For example, if national central counterparty is not a viable and efficient model for a
small economy, then the cost of hedging would increase with higher risk weight under
Basel III. Meanwhile, if derivatives are cleared overseas, through regional or global central
counterparties, we need to consider implication for cross-border supervisory coordination,
financial stability, and development of local financial market and competition. On a
related issue of Dodd-Frank Act, restriction on proprietary trading of US bank could
impact the liquidity of US dollar markets abroad, as well as liquidity of foreign
government bond markets which are the back-bone of their monetary policy operation.
Another key issue going forward is the balance of authority between Home and Host
regulators. There are concerns about the proposal of Financial Stability Board on
cross-border resolution of Global Systemically Important Financial Institutions, or G-SIFIs.
The concern is that some Host regulators may not be included by the Home regulator in
the Crisis Management Group or resolution planning, even if the institution is systemically
important in their jurisdictions.
We are glad to see the FSB taking initiatives to identify potential problems. Now it is the
time to work together on solutions in an inclusive manner. This is because the
inclusiveness of the process assures acceptability and commitment, and reduces the
uncertainty from unilateral action of individual countries. These international regulatory
standards have no direct international enforcement power. Before the global crisis, the
governance is based on discipline which came from the market discipline, but now market
discipline has diminished. Also the influence and discipline from the IMF program or FSAP
may have been somewhat countered by growing importance of regional financial
assistance mechanism with their own governance. Each country or region would be more
likely to adopt these new standards if they buy-in to the rationale of the reform.
Inclusiveness and coordination are therefore keys for commitment, and the pillars
of the new governance for bodies such as the Basel Committee and Financial Stability
Board; this is perhaps the new Bretton Woods.
Turning to longer-term challenges and strategy, Asia's increased economic importance
will rise as a consequence of its development efforts in liberalizing the economy and the
financial system, allowing market forces to enhance efficiency and productivity. These
forces will accelerate with increased integration of the ASEAN Economic Community,
ASEAN plus 3, and plus 6.
For intra-Asia's financial flows, Asia is not "homogenous" - the "North Asia" and
financial center economies are developed, and some are mature economies facing their
own challenges. The rest of Asia is emerging economies, some facing middle income
trap, and some facing the transition challenges from centrally planned to market
economy. "North Asia" will tend to have savings surplus, and need growth potential and
to export of FDI. "South Asia" will need savings to finance investments. There is a
natural synergy in resource allocation, industrial and logistic linkage. Thus, regional
financing and growing role of regional-centric financial services would naturally follow.
The most critical challenge emerging Asia faces is to build economic and financial
infrastructure fast enough to properly harness the growth energy and put these
capital into productive use. Without adequate financial infrastructure, namely market
and legal infrastructure, and financial literacy, there is potential risk that emerging Asia
cannot absorb such flows. This could result in misallocation of resources, including asset
bubbles and instability. In parallel, public investment in infrastructure projects, as well as
social investments in education and healthcare, are keys for increased productivity and
economic upgrade. The challenge lies in getting the right balance between growth and
stability, in managing large and long-term financing, increasing public investment, while
keeping financial discipline.
These are complex issues on how to ensure efficient resource allocation. A key
strategy is to enhance the role of the market mechanism of the financial sector in
Asia to rise to the challenge, and to act as check-and-balance on public policy.
In closing, we are at an important turning point where we face paradigm shift. This is one
of the realignment of relationship between the market, regulators, and society. In crisis
countries, the balance of the relationship between the financial industry and the
society shifts because the cost of financial crisis is born by the society. In emerging
Asia, public policy including financial regulation comes under pressure from social demand
for financial access as well as consumer protection. These naturally accompany the
take-off in growth as a result of economic and financial liberalization.
Both banks and regulators need a proactive strategy to deal with social and political
environment that will shift banking environment and regulatory paradigm. Thus, the
strategy for banks going forward must also include proactive governance and
accountability framework that seeks to restore trust in market mechanism, and
improve the social and political environment in which they operate. Failing to
recognize the powerful social forces will result in less than optimal regulations. Similarly,
the strategy for successful global regulatory reform is to assure an inclusive
process, to garner commitment and credibility for the reform.
In concluding, the key strategy for dealing with this paradigm shift of known-unknown is
based on 3 Cs. Coordination to deal with our interconnected financial stability.
forged by global reform process. And,
Commitment inclusive Communal responsibility,
or governance, that can regain trust of society in market mechanism, so that we can rebuild
market discipline as a key governance and pillar of the financial system. These are our best
hope for striking the right balance between risk and return, growth and stability, and
regulation and market discipline at a time of known-unknown.
Thank you for your attention.