Imagining If Key Foreign Banks Start Reducing Their Exposure in Asia
IMF Blog, June 11, 2012
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- Authors: Anoop Singh
- Published: June 11, 2012
Context and central question
- European banks play an important role in supplying credit to several Asian economies.
- Central question: What happens if European banks start reducing their exposure to the region?
Geographic and sectoral exposure
- Largest borrowers from European banks: Australia, Hong Kong SAR, Korea, Malaysia, New Zealand, Singapore, and Taiwan Province of China.
- China, India, and the economies of South East Asia generally have smaller liabilities to European banks.
- Among European banks, those from the United Kingdom have a particularly significant presence in Asia.
- For most regional economies, the nonbank private sector—businesses and households—is the main recipient of credit from foreign banks as a whole.
- European banks play a prominent role in trade credit and specialized project financing.
- In several Asian economies, lending by local subsidiaries and branches is funded primarily by local deposits, reducing potential deleveraging pressures.
- Domestic banking sectors that are relatively more reliant on European banks for wholesale funding: Australia, Hong Kong SAR, Korea, New Zealand, Singapore, and Taiwan Province of China — increasing their vulnerability to deleveraging through the financial system.
Evidence from 2008 (historical scenario)
- Deleveraging by European banks during 2008 led to a large contraction in credit supply in destination countries.
- The credit contraction in Asian economies in response to the deleveraging was substantial, but the size of the response was smaller—by about 50 percent—than that for a broad sample of countries.
Explanations for a more muted transmission in Asia
- Stronger policy response
- Evidence suggests the monetary—and to a lesser extent the fiscal—policy response in Asia was more vigorous than in other regions.
- Additional measures taken to maintain market confidence and stabilize financial markets included:
- instituting liquidity guarantees,
- negotiating Federal Reserve swap lines,
- strengthening regional reserve pooling,
- expanding deposit insurance,
- supporting trade finance and SME programs.
- Healthier local banking balance sheets
- Asian financial firms had lower leverage ratios—the ratio of debt to equity—relative to global peers, supporting the idea that balance-sheet health reduced transmission.
How Asia could handle a future shock (forward-looking assessment)
- The space for a macroeconomic policy response is smaller than it was entering the global financial crisis, but Asia’s policymakers still have ample room to react appropriately to a sharp deleveraging of foreign banks arising from a euro area shock.
- Capital adequacy ratios, which exceed regulatory norms in most economies, together with low nonperforming loan ratios and room to offer liquidity support, suggest relatively healthy local banking systems should provide a buffer, as they did in the wake of the global financial crisis.
Imagining If Key Foreign Banks Start Reducing Their Exposure in Asia — Anoop Singh, June 11, 2012