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The rise of Asian lenders may benefit global financial stability

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In Brief

It used to be the case that a small group of European and US banks dominated the international finance scene.

Today, Asian banks are steadily climbing up the ranks of global lenders, while US and European banks have started to slide. From 2007–13, data from Thomson Reuters indicates that Japanese mega bank Mizuho Financial Group climbed 10 places from 17th to 7th.


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In the same period, Bank of China moved from 124thplace to 29th. By contrast, Royal Bank of Scotland, the leading global bank from the UK, fell from 3rdto 8th, while Dutch bank ING has slipped from 13th to 20th.

The withdrawal of Western banks from international lending markets following the seismic shock of the 2007–08 global financial crisis was the biggest ‘pull factor’ explaining Asian banks’ increased overseas presence. US banks in the epicentre of the crisis have only just recovered. Their European counterparts, who make up the majority of global lenders, are still embattled in an extended deleveraging process.

However, without a strong ‘push factor’, the rise of Asian banks on the international stage would not have happened in the first place. And it certainly would not be sustainable in the long term. This strong push factor is excess liquidity. In Japan, it results from more than a decade of loose monetary policy, beginning from 2001, when it embarked on the world’s first quantitative easing (QE) program. From 2002 to the second quarter of 2013, Japan’s cross-border lending doubled to reach US$3 trillion.

China tells a slightly different story because its excess liquidity comes from its ever-rising deposit base, which serves as a major driving force for Chinese banks to go global. Bank deposits to nominal GDP increased by 22.7 per cent from 2001 and 2007, significantly above the 14.9 per cent expansion recorded during the previous six-year period. Large saving surpluses have led to a sharp expansion of bank balance sheets as well as a steady growth in foreign loan books. While stringent capital controls limit Chinese banks’ ability to lend abroad, the value of overseas loans granted by its top five banks last year doubled from 2010. If capital controls are relaxed at a later stage, cross-border lending from Chinese banks is likely to surge.

A growing role for Asian banks in the international lending market is a relatively new phenomenon. It is certainly good news for the Asian bankers’ long-held global aspirations. More importantly though, it may have positive implications for global financial stability.

First, the participation of Asian banks in the international lending community could help improve banking performance in Asia, which may in itself reduce the likelihood of bank failures and strengthen financial stability in the region.

Asia is home to a bank-centric financial system. Despite this, banks performed poorly for decades before beginning to improve after the Asian financial crisis hit in 1997. Widespread government micromanagement and hefty hidden nonperforming loans are among the biggest problems currently impairing banks’ financial health and performance. Compared to domestic lending, international bank financing is much more transparent and competitive. One immediate benefit of participation is that it forces Asian banks to follow market disciplines. Banks can also take the opportunity to follow good lending practices and reduce the risk of bad loans. Lending abroad additionally enables Asian banks to look overseas for higher yields and to counterbalance domestic market swings. A globally competitive banking sector will help build a strong and resilient Asian financial industry, which has become an increasingly important part of the global system.

Second, credits from Asian banks can play a critical role in diversifying global funding sources. A valuable lesson from the recent global financial crisis is that liquidity shocks are transmissible across borders and that diversification is the key to preventing tensions from escalating and spreading. In the aftermath of the financial crisis, with the tapering of the US bond buying program and an eventual rise of interest rates in advanced economies, countries and businesses reliant on off-shore funding will fall victim to any further slowdown in cross-border flows from the industrial world. The need for alternative credit lines would then become acute, and financing provided by Asian banks would be a stabilising force for the global financial market.

Nevertheless, credit risks associated with foreign lending should never be underestimated. Lending abroad is like swimming in unknown waters for many Asian entrants. Assessing and managing a range of unfamiliar risks requires an entirely new level of know-how and capacity. Asian banks will not be able to complete their transformation into global banks without passing this test. If they do, there is no reason why Asian banks cannot be a force for growth and stability in the new financial landscape.

Ying Xu is a lecturer in International and Development Economics and a research associate at the Centre for Applied Macroeconomic Analysis at the Crawford School of Public Policy, ANU.

This article summarises some of the research findings of a research project on foreign banks and international shock transmission lead by Dr Ying Xu. This research is supported by the Centre for International Finance and Regulation (Project Number E046) which is funded by the Commonwealth and NSW Governments and supported by other Consortium members.

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