Asian bankers urge members to reduce their risk exposure

MANILA, Philippines - The Asian Bankers Association (ABA) has urged its 120-member banks, including their regulators, to lessen their risk exposure and increase regulations on non-bank financial institutions.

The ABA issued a position paper during its 26th general meeting and conference held Friday urging all Asian banks “to resist the urge for higher yields through risk-taking, and that mortgage finances should be carefully appraised, and real estate lending should be capped.”

“We urge Asian banks not to lower credit standards and engage in riskier lending activities with maturity and currency mismatches (i.e., funding of long-term loans or investments using short-term deposits, or borrowing foreign currencies to finance loans denominated in the national currency). And heavy investments in property-related securities should be avoided,” it said.

Asian banks were not spared from the impact of the global financial crisis but they were able to weather the storm better than its counterparts in the West.

President Arroyo, in her speech at the same forum, pointed out that most Asian banks were relatively healthy and resilient, noting that this could have stemmed from their previous experience during the 1997 Asian financial crisis.

Another factor was the early adoption of reforms and recommended regulations in the Basel II framework and the International Standards for Accounting (IAS).

Thus, the ABA likewise recommended to monetary and financial regulators in the region to expand financial regulations and supervision on investment banks, hedge funds, private asset pools, mortgage brokers, credit rating agencies and securitization vehicles.

“These non-banking financial institutions have been lightly regulated or generally not supervised prudently by financial supervisory authorities. Failures of these businesses can cause financial instability, so they need to be closely regulated and supervised,” it said in the position paper.

ABA also urged its bank members and their respective regulators to establish an early warning system for financial crisis.

The regional banking group said the warnings are too scattered and unspecified to attract policy action.

“The concerned international organizations, such as the World Bank, the International Monetary Fund, regional development banks, as well as economists, financial experts, and national financial regulators are urged to develop an early warning system. This system would allow the authorities to take appropriate action immediately prior crisis, with the aim to prevent future financial crisis,” it added.

They said international cooperation is needed to coordinate fiscal and monetary policies, to deal with troubled financial assets, and to rescue failing banks.

Private banks and the regulators need to strengthen the mechanism of information sharing, joint risk assessments, liquidity support, pooling funds, and currency swap arrangements between national regulators.

“International cooperation is important and urgently needed to prevent or mitigate international financial crisis,” the ABA stressed.

Like the rest of the global banking institutions, the regional forum dissuaded Asian banks from continued dependence on statistical analyses by credit agencies, while placing more reliance on its own due diligence.

“The ABA supports the continuing practice of sound banking principles and better risk management in order to achieve an appropriate balance between return and risk. The build-up of excessive leverage by financial institutions is risky and unmanageable,” it said, adding that Asian banks should accumulate enough capital during good economic times in order to be prepared for a soft landing during bad economic times.

There is a need to ensure sound financial innovation and effective financial regulation and supervision, it added.

Last August, the ABA already urged government in the region to adopt innovative strategies to further promote financial inclusion to encourage more commercial banks to provide services that increase financial inclusion levels, such as developing policy frameworks to promote access to microfinance services of migrant workers throughout the region.

It also asked governments to review taxation frameworks to encourage commercial banks to expand microfinance services in rural areas and marginalized communities.