"The Role of Finance and Banking for the Prosperity of Asia"
Speech by Dr. Veerathai Santiprabhob
Governor of the Bank of Thailand
IIF lunch seminar during the 50th Anniversary ADB Annual meeting
6 May 2017, Yokohama, Japan
Mr. Timothy Adams, President of the Institute of International Finance,
IIF fellows, distinguished guests, ladies and gentlemen,
A very good afternoon to you all.
I am honoured to be here today and be a part of this remarkable event celebrating the 50th
anniversary of the Asian Development Bank. I would like to thank the Institute of International
Finance for hosting this lunch seminar and for inviting me to share with you my thought.
Throughout the past five decades of the Asian Development Bank, the ADB has been a trusted
development partner of the public and private sectors in Asia. Its lending packages, technical
assistance along with policy dialogues have been tailored to specific needs of member
countries, and have helped reduce poverty and laid foundations for inclusive and sustainable
growth in Asia. Evidently, the number of people living in extreme poverty has fallen markedly
across Asia throughout the past decades.
Half a century is an important milestone. It is an opportune time to look back and look forward.
My topic for today is "The role of Finance and Banking for the Prosperity of Asia". I will
start off briefly with the past journey of Asian development, and then focus on how to prepare
our bank centric financial system for challenges and opportunities that lie ahead in this rapidly
evolving economic environment and financial landscape. Having a smooth-functioning
financial system is of course a necessary condition for growth as finance is often referred to
as the life blood of the economy. On the other hand, if the blood is infected, it could lead to
severe malfunctions of the body and serious adverse consequences. Thus, going forward, in
pursuit of the prosperity of Asia, I propose that the role of finance and banking must focus on
three key words: "productivity, immunity, and inclusion". I will come back to these three
key words later in my talk.
Ladies and Gentlemen,
Let's begin by looking back over the past fifty years. Undoubtedly, it has been an
incredible journey of Asia's achievements. From a primarily agrarian and poor region in the
1960s, Asia has transformed itself into today's key engine of the global economy. According
to the latest IMF's World Economic Outlook, emerging and developing Asia is expected to
grow at 6.4 percent in 2017, making it the fastest growing region and contributing almost half
of the world's output growth.
To get to where we stand today, Asia has gone through various rounds of boom and bust
cycles. The Asian Miracle decades in the 1980s and 1990s were largely fueled by the
industrialization, rapid capital accumulation, migration of cheap labour, urbanization,
emergence of middle class, and hot money, largely supported by banks at the core of financial
intermediary. The "miracles" eventually turned out to be a crisis in the making, and Asia had
learned the lessons the harshest way.
Fortunately, Asia has come a long way after the Asian Financial Crisis. A series of structural
reforms were carried out to reduce structural weaknesses, improve growth potential and
safeguard monetary and financial stability. Policies, including monetary and exchange rate
policies, prudential regulations and supervision, as well as legal and market infrastructures,
have been redesigned to prevent distorted incentives that could lead to vulnerabilities or
building up of fragility in the system. Thus far, the Asian economies' and financial systems'
resilience has been well tested by the Global Financial Crisis and its aftermath.
However, against the backdrop of the increasingly volatile, uncertain, complex, and
ambiguous world we live in today, we cannot be complacent and I think it is not an
overstatement to say that the real challenges still lie ahead for Asian financial systems.
Ladies and gentlemen,
After the Global Financial Crisis, the persistently low-growth and low-yield environment
has affected Asian banks in various channels. Deteriorating asset quality with higher credit
costs tends to outweigh benefits of the lower funding costs, thereby squeezing profit margins.
Furthermore, new flow of credit demand has been sluggish, owing to the low-growth prospect,
low private investment, excess capacity in many industries, and low commodity prices. The
loan growth prospect has also been hampered by the more attractive funding sources in the
capital market. Debt overhangs of both corporates and households in many Asian economies
have also undermined investment and consumption, while threatening financial stability in
some countries. In addition, the trend towards trade protectionism and growing
geopolitical tension in the Northeast Asia and the South China Sea could jeopardise both
growth and stability in our region, leading to financial volatility and possibly much higher cost
of funds.
Along with rapidly changing and increasingly volatile economic and financial environment,
technology advancement is fast re-designing financial and business landscape. Sharing
economy will soon become the key feature of modern economy and financial system.
Crossborder transactions of e-commerce as well as payment and settlement will become more
widespread. New fin-tech firms have offered financial products unbundled from the
longstanding value chain of banks. Certain banks' existing business models might be obsolete
and they must be agile enough to keep up with customers' new lifestyle and requirements
as well as competitors' new business practices. In the current world, banks having economies
of scale and scope might not gain advantages without agility and economies of speed. And,
one should not forget that new forms of technology also bring along new forms of risks.
Among others, cyber safety should be in the top priority of all banks.
Looking forward, roles of Asian banks as intermediary could be diminished on the back
of the growing capital markets and shadow banking, which includes not only traditional
ones like asset management companies and savings cooperatives, but also more modern ones
like crowd-funding and peer-to-peer lending. Capital account liberalization will also lead to
asset diversification abroad. Banks' funding sources are likely prone to be more vulnerable
and volatile, with the increasing interconnectedness between banks, non-banks and capital
markets. After many years of consolidating our financial systems after the Asian financial crisis,
technology could fragment our financial systems in an unprecedented way. Regulatory
arbitrage could lead to pockets of vulnerability, particularly in the less-regulated or
unregulated areas of shadow banking.
Ladies and gentlemen, the need for rapid transformation in Asia is not limited to only banks
and financial institutions. Changing technology, changing demographic structure, and changing
global operating environment also necessitate that Asian businesses transform themselves to
be able to compete in the new environment, where productivity is key. In addition, they need
to improve their risk management and immunity to be able to cope with increasing volatility
and uncertainties of the modern world.
It is also crucial that Asian banks and businesses understand developments in the society
at large that could affect their operating environment, chief among these is income
inequality. The income gap in many Asian countries will widen further and threaten social
and economic stability, as those with higher capital can more easily reap benefits from
economic growth and new technology, leaving those without access or know-how further
behind. Evidence has shown that benefits from economic growth are highly concentrated and
not at all broad-based. Rising income inequality has raised social polarization and we have
seen it culminated in Asian politics even before the Brexit vote and the U.S. Presidential
election.
Ladies and gentlemen,
While all sectors of Asian economies, including businesses, households, banks, financial
institutions, as well as authorities, must transform themselves in order to thrive in the new
world, I strongly urge that banks and financial institutions look beyond their conventional
financial intermediary function, and get actively involved in addressing the key issues of the
economy. After all, the financial system is the blood vessel of the economy.
Facing with these challenges, and aspiring to achieve a sustainable and prosperous Asia
for many more years to come, financial system must, at the very least, help with the
three key words I mentioned earlier: 1) productivity, 2) immunity, and 3) inclusion.
First, to enhance productivity, the trend in technology advancement together with
research and development will be the key enablers to increase productivity in Asia. The
IMF's chief, Madame Christine Lagarde, has recently warned that "another decade of weak
productivity growth would seriously undermine the rise in global living standards". In this
regard, banks have to embrace and employ technologies not only to improve their
organisation's own competitiveness, but also to be able to provide more efficient and
lowercost financial services to Asian businesses and households. Regulators also need to establish
an ecosystem that encourages financial innovation, competition, and efficiency improvement.
In my view, there are at least two areas that banks and financial institutions could help
improve productivity.
First, digitization will certainly enhance productivity in financial services. In Thailand,
electronic payment and digital banking are becoming increasingly widespread. Under the
national e-payment program, businesses, households, and the government will significantly
benefit from the cost reduction of financial services both in terms of money and time saved.
Many initiatives under the national e-payment program, for instance, the new faster payment
system or "PromptPay" and electronic government payments will provide foundation for
many new add-on applications that will improve productivity across different segments of the
Thai society. Thai banks have definitely played significant roles in hatching out these initiatives,
starting from ideas and all the way through to implementation.
Second, financial connectivity, particularly within our region, will also play a key role in
enhancing productivity. Regional cooperation amongst Asian countries, not only in trade and
investment, but also in finance has a potential to expand much further. I strongly believe that
improved financial connectivity in Asia will be mutually beneficial to all. There are already
many ongoing initiatives, for instance, promoting the usage of local currency in the region, the
ASEAN Banking Integration Framework, the Asian Payment Network, and the Asian bond and
capital market initiatives. Despite progress made thus far, financial institutions and
policymakers in the region could step up our joint efforts in various ways.
Let me now turn to immunity, which is equally important under the increasingly volatile,
uncertain, complex, and ambiguous world in order to keep the financial system resilient
throughout and thus be able to continue to support their clients and the real economy.
As the financial system is the blood vessel of the economy, immunity needs to start from
safeguarding against blood infection. We will need to ensure that banks have adequate capital
and provisioning cushion to be able to withstand swings of economic cycle and financial
volatility. The Bank of Thailand welcomed the post GFC's regulatory reform addressing
concerns on systemic risks including the conservation buffer, the countercyclical buffer, G-SIBs
and D-SIBs, as well as the recovery and resolution plan to further strengthen financial safety
net. To complement these rules, and build a better immune system that is strong and resilient
through any cyclical or structural shocks, I believe we need to target the underlying factor
contributing to immunity, namely, the culture and behaviour of banks.
Fundamentally, an organisation is predominantly defined by its behaviour and culture.
Behaviour and culture influences operations at almost every levels within an
organisation, ranging from decision making, strategic positioning, as well as risk appetite
and risk taking. The risk-reward incentive structure has to focus more on long term gains
rather than short-term profits, and the design of compensation scheme should fully reflect
that aim. The strong culture of risk awareness and good governance should be rigorously
instilled such that it becomes organisational culture and natural behaviour of bankers. Culture
of transparency along with proper check and balance also contribute towards a solid
foundation of banks' immune system.
The other area of immunity that will be key for financial institutions is immunity against
cyber security risks. Everyone, every bank, every system must be prepared and ready to
both prevent and respond effectively to cyber security risks. Incidents of cyber attacks,
no matter how small, can undermine the integrity of the financial system. To boost the
immune system, it is imperative that cyber resilience and cyber security be given the highest
priority.
Ladies and gentlemen,
Financial stability could not exist without social stability, which brings me to my third
and last point that requires collaboration from financial institutions. The economic
benefit of growth has to be inclusive and financial system can play significant roles in
promoting inclusive growth, starting with financial inclusion.
The people at large must have access to basic financial products including payment,
savings, credit, and insurance. The pricing has to be lower, choices wider, and access better.
Products that we should see more of are, for example, basic savings account with no minimum
balance to cater for the low-income group, low-fee payment and transfer services, micro
insurance for farmers, and increased information-based lending to small businesses
complementing to collateral-based lending.
Despite the high level of access to finance in Thailand relative to other emerging Asian
countries, the Bank of Thailand regards financial inclusion as one of our top priorities. In
collaboration with both banks and non-banks, we have continually put our efforts to promote
financial access in many areas. They include, for instance, SMEs' credit guarantee scheme,
free-of-charge fund transfer through our new faster payment system for any amount up to
5,000 Thai Baht (approximately equivalent to 145 US dollar), no-fee bank savings account,
nano finance to accommodate small borrowers, as well as the new Business Securities Act to
widen the scope of eligible collateral for secured lending. In addition, we will soon launch an
unsecured debt restructuring scheme for individual borrowers with multi-creditors to address
the household debt overhang.
To ensure a "good quality" financial inclusion, financial literacy and financial technology
literacy are crucial life skills for both households and small businesses. Effective financial
literacy would help increased consumers' financial discipline and understandings of financial
products and their risks. Thus, deepening such basic knowledge and turning concepts into
changing behaviour would be particularly helpful to shelter vulnerable businesses and
households from getting themselves into over indebtedness or stuck with unsuitable financial
contracts.
Besides, as technology advancement permeates into all businesses, all lifestyles, and all
sectors, if we also could ensure that households and small businesses that make up the
majority of our economic agents can practically apply and benefit from the new technology,
while being aware of its associated risks, then we could significantly raise their standards of
living.
Ladies and gentlemen,
That brings me to the end of my talk today. To aspire for a better standards of living for all
citizens of Asia for the next half century and more, we, all of us, must collectively do our part
to ensure inclusive and sustainable growth. In so doing, banks and financial institutions, as
the blood vessels of our economy, have important roles to play to prevent the blood
from being infected as well as to ensure the well-functioning of our blood circulation
for more productive, better immuned, and more inclusive economies in Asia.
Thank you very much for your kind attention.