Who do you call when you want to speak to Asia? This question, famously posed by Henry Kissinger about the European-integration project, also rings true in the world’s most dynamic, but fragmented, region.
Regulatory co-ordination efforts are failing to keep pace with banking and capital flows, as there is no single authority to call in Asia. Diverse markets, conflicting interests and failed policymaking add to the regulatory challenge.
Piyush Gupta, CEO of the Singaporean lender DBS, expressed these fears to Euromoney this month: “No institutions have been particularly successful in deepening, coordinating and reforming capital markets in Asia relative to what is needed.
And he should know. DBS, like its Chinese and Japanese counterparts, has expanded its regional footprint for the past five years, by growing its balance sheet and trade-finance facilities in Indonesia, India and China.
Asian regulators must ensure they are not asleep at the wheel unlike their western counterparts pre-crisis, as capital and trade flows within the region jump, foreign banks increase their exposures to China, while Hong Kong and Singapore remain ever-expanding financial hubs.
Currently, Asian policymakers, supervisors and securities officials coordinate policies and assess financial stability through a fragmented and ad-hoc series of talks and negotiating blocs that are not fit for purpose. At the same time, portfolio and banking flows are set to grow in complexity and volume, while capital-market reforms are needed.
Asian regulators lack a holistic understanding of new threats: capital-flight risk, intra-regional hot money and shadow-banking flows and the implications of the renminbi’s rise on regional trade and deposit patterns, among other things.
What’s more, new global capital and liquidity rules, from swaps regulation to trade and receivables financing – which makes up as much as 40% of small-business financing in Asia compared with 5% in North America – are ill-suited to the region. This reflects the absence of Asian voices on international fora and the failure of Asian institutions to champion the region’s interests.
Even within the region, regulations vary immensely. Banks grumble about fragmented liquidity pools and high operational costs given onerous rules that require trades to be cleared by locally-regulated houses in India, China and South Korea, for example.
Meanwhile, Asian financial centres, from Singapore, Hong Kong to Tokyo, are conflicted between boosting capital-market harmonization, on the one hand, and entrenching their status as global hubs.
Against the backdrop of frenetic economic growth, it is time regulators considered the merits of establishing an exclusively Asian regulatory body, which incorporates members across the large north, south and southeast Asian markets, or, at least, bestowed an existing body with this beefed-up mandate.