Imagining If Key Foreign Banks Start Reducing Their Exposure in Asia

IMF Blog, June 11, 2012

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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?

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.

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.

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.

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