Speech

Building Financial Sector Stability to Ensure Asia’s Continued Success

September 14, 2015

As Prepared for Delivery

Good morning, ladies and gentlemen. I’m delighted to welcome you to the second Conference on Banking Supervision and Regulation, where we highlight key lessons from the IMF’s technical assistance program in Asia.

This conference comes at an important moment. As you know, this region has been the focus of considerable attention in recent weeks. Concerns in the markets about the Asia’s economic prospects have given new focus to public servants who work hard to keep uncertainty at bay. It is our responsibility to ensure that financial sectors continue to support this region’s great economic achievements. That places a premium on the issues we are addressing today.

JSA

It is important that we are meeting in Japan because so much of our TA work has been made possible through generous Japanese support. TA to promote financial stability through effective banking supervision receives funding from the Japan Administered Account for Selected IMF Activities. Until recently, as a Vice Minister for Finance, I was on the funding side of this effort. Now I am happy to sit across the table and put this money to use in the Asia-Pacific region and beyond.

Through the JSA Japan has become the single-largest contributor to the IMF’s capacity building activities worldwide. In dollar terms, Japan now accounts for almost 40 percent of our donor-funded TA. As we speak, the JSA is funding the placement of long-term resident advisors in three countries in this region. So please allow me to express our deep gratitude to Japan’s Ministry of Finance for its continued support, including for this event.

We are organizing this conference to learn from the experience of TA recipients some of whom have kindly agreed to speak. We also have speakers from the Japan FSA; South Korea’s Financial Services Commission; Reserve Bank of India, and the China Banking Regulatory Commission. They will present their views on key issues highlighted by the global financial crisis related to bank governance and supervision, particularly pertaining to cross-border and consolidated banking.

Asian Banking Sector

Let me set the stage for today’s discussion.

Over the last two decades, Asia has been the fastest-growing region in the world, now making up around 30 percent of the world’s GDP. Reflecting this growth, Asian banking sectors have become bigger, more complex, and closely intertwined. The region comprises advanced economies, international financial centers, and emerging and developing economies; and is home to systemically important global institutions.

In this environment, the role of bank regulators is paramount—to ensure that the operations of financial institutions do not pose risks for stability and growth. While significant regulatory reforms have been adopted since the global financial crisis to address systemic risk, these initiatives are likely to challenge bank supervisors and regulators.

Corporate Governance

One crucial challenge is corporate governance. While most countries tend to have regulatory frameworks in place, many do not have the supervisory practices to support these frameworks. Thus, a core purpose of JSA-funded TA in the region is to enhance financial stability by building effective banking supervision to ensure strong corporate governance.

Among the beneficiaries are Bangladesh, Cambodia, India, Indonesia, Lao PDR, Maldives, Myanmar, Nepal, and Philippines. These initiatives have been multi-year projects, focusing on enhancing institutional capacity and regulation to promote financial stability. These efforts tailor international best practices to country circumstances.

Strengthened corporate governance at commercial banks is certainly an important component of these supervisory standards. The Fund’s experience with banking crises highlights the enormous negative consequences of poor governance.

Risk management, is at the heart of bank corporate governance. It is important for their own activities and for the whole financial sector. In this context, the Basel Committee has updated its guidance on corporate governance. It has developed principles describing a bank board’s responsibility for risk appetite, implementation of a risk management framework consistent with the bank’s risk profile, and the alignment of compensation with long-term objectives. It also requires that supervisors assess bank corporate governance. I look forward the discussion of governance and its application in the Asian banking context.

Consolidated Supervision

A second challenge is to devise an effective framework for consolidated supervision. Our assessments of financial systems suggest that most countries have problems identifying and dealing with risks posed by the financial institutions and activities that span sectors and cross borders. Our Spring 2015 Global Financial Stability Report analyzed Asian banks’ geographical allocation of assets. The share of regional assets rose from about 10 percent to close to 20 percent of total assets after 2008. This partly reflected the internationalization of Chinese banks. Cross-border bank flows to Asian economies (excluding Japan and Australia) increased by about 80 percent between 2007 and the first quarter of 2015.

While cross-border banking brings diversification, risk-sharing, and investment benefits to home and host countries, stronger regional linkages also bring the potential of greater vulnerability to cross-border shocks. This is particularly important within corporate groups as affiliates in different jurisdictions increase the risk of contagion. The failure of a group or its affiliates can threaten financial stability in multiple jurisdictions. We saw this during the global crisis when shocks moved rapidly from the U.S. housing market to global markets.

This creates challenges involving bank supervision and regulation, and crisis resolution. Financial reforms that help strengthen the soundness of parent banks can help limit the transmission of negative shocks by foreign affiliates. A pragmatic approach involves information sharing, harmonized institutional and regulatory frameworks to ensure consistent implementation of regulatory standards, and compatible arrangements for cross-border resolution. These shared objectives, combined with stronger cooperation and coordination among regulators and supervisors, can ensure the benefits of globalized banking while limiting the risks to financial stability.

Future Challenges

Looking ahead, it is clear that Asian financial systems will continue growing in size and complexity. They have the potential to enhance innovation, integration and inclusion. More interconnected financial systems can allow households and pension funds, among others, to diversify; ideally, reducing risk. They can provide new sources of corporate financing to drive the next stage of Asia’s remarkable growth.

But as financial integration grows, the role of regulators and regulatory cooperation becomes ever more important. This is how we can keep one country’s problems from becoming systemic. The IMF can work with this region’s regulators and supervisors to help ensure the safety of this process. This conference is one small step to enhance this collaboration.

Let me conclude by thanking all of you for being here, and for your constructive contributions to these important deliberations. I wish all of you a very pleasant stay in my hometown and very productive discussions.

Thank you.