I had the privilege to attend the Asian Bureau of Finance and Economic Research (ABFER) roundtable on Governance and Regulations. The discussion was lively and insightful, with frank inputs from both academia and industry about the outlook and impact of financial regulations in Asia.
I don’t purport to have digested every comment and most certainly don’t claim to be comprehensive in my notes taking but these are my take-aways.
Professor Randall Morck gave an excellent summary about financial regulations being the children of crisis and how as far back as the economic crisis in France in 1789, the effects of liberalization and re-regulation had not always produced real economic benefits to the society. Particularly poignant was the observation on the lack of economic theories in the business of regulation. It is a shocking revelation that regulations had not been drawn on sound economic basis but rather arbitrarily, panning to the vagaries of politics. Professor Morck calls Basel III a still-born. Economic researchers have their work cut out.
Mr Andrew Sheng corroborated that “Asia is now taking medicine that is not designed for us”. He said that over-regulation is sheer folly and if as a result, capital constraints start to impede growth in Asia (the only bright spark in the world), global recession would ensue. Coming from a former chairman of HKMA, do take heed!
The next 3 panellists are prominent industry leaders.
My Piyush Gupta (CEO, DBS) reiterated that fast forward five years, Asia will be short of capital, despite the fact that at this juncture, Asian banks are comparatively well capitalized. This view was endorsed by Mr Jaspal Singh (CEO – Asia, StanChart). Mr Gupta lamented that funding in the region is conducted mainly via banks as companies and individuals continue to be heavily reliant on bank credit. With the new rules constricting bank capital, they will not only hamper access to financing but lead to escalating costs. He shared that DBS had already been re-pricing loans to the real sector.
Mr Jaspal Singh echoed the views of Mr Gupta. Mr Singh said that today, central banks are no longer lenders of last resort but FIRST resort. (I also said) This is problematic as it could lead to “minimum-sum” bubbles and enact future rashes of crises. Despite that, progress on financial inclusion is still slow. Mr Singh opined that the new reality is that banking would become more like utility companies and investors will have to moderate their returns expectations. He also said that in the drive to preserve capital, one should also expect banks to restrict dividends. Hmm…but then low dividends don’t seem to go hand in hand with utility companies!
With such prognosis, I am not sure how any bank investor could feel excited! Both bankers proposed alternative solutions, such as securitization redux and developing the high yield bond market but issues of exclusivity remain.
Dr Teh Kok Peng is a board member of OCBC. He shared that OCBC had a conservative culture. Financial prudence translated to its ranking as the world’s safest banks by Bloomberg. Nevertheless, like the rest, OCBC has seen a significant rise in compliance costs. Dr Teh seemed in agreement with Mr Singh and opined that banking should revert to its more benign and subdued utility form of the 80s. Of course, this option is no longer possible, as the quest to attain universality through mergers and acquisitions in the past decades have entrenched banks into “Too Big To Fail” (TBTF) institutions – a menace to the system difficult to resolve. Lastly, it is vindicative to hear Dr Teh say that Basel III rules will hurt SME financing. (see here)
In summary, the common thread of the discussion was that regulations lack economic principles and Asia should find its own way. Continuing the present trajectory will lead to capital constraints even in a fortress region like Asia and shall have significant impacts to the real sectors. The panellists have dropped a few hints on alternative funding channels. I guess this is acknowledgement that banks are no longer special?
May I propose plan B?