2008 Manila – Regulatory Reform in the Asia-Pacific Region
In 1997, the Asian Crisis demonstrated the severe impact of the financial market breakdown on economies with unsustainable economic and financial policies. The experience compelled Asian countries to embark on initiatives to strengthen their financial systems including establishing an adequate regulatory environment and adopting minimum standards for capital adequacy under the Basel II Framework and advocate for a new international financial architecture.
Eleven years after the crisis, Asia’s financial system has become substantially deeper and more robust. Contributing to the dynamism in the region is the rise of China and India, the reemergence of Japan, the stable economic growth of Russia, robust inter- and intra-regional trade, increased financing for infrastructure, and opportunities presented by increasingly powerful Asian sources of capital.
The Asia-Pacific region (note 1) has since become a key driver of global economic growth. With a combined market of 4 billion people, the region accounts for approximately 61.2% of the world’s population and approximately 29% of world GDP. Dynamic economic growth continues in the region, contributing to an expanding world economy and supporting an open international trading system. (note 2.)
Amid the global economic slowdown resulting from the current financial turmoil and threat from rising inflation, strong macro-economic fundamentals, strengthening regional domestic demand and increased intra-regional trading are serving the region well.
Trade and investment agreements and regional market integration have lowered the risks of investing abroad thereby fuelling outward investments. With fiscal and economic reforms in place, Asia-Pacific countries now have large foreign reserves which, according to studies by the UN-ESCAP, are invested outside the region. (note 3.)
Benefiting from growth in their home markets, the corporate sector has been increasingly investing in neighboring developing economies and in developed economies as strategy to secure access to global supply chain, markets, brands, scale economies, technologies, human capital. Leading the pack are Japan, Hong Kong, Singapore, South Korea, and Taiwan.
The financial turmoil is offering prime investment opportunities for sovereign wealth from the region. State-owned firms such as Singapore’s Temasek Holdings pumped in USD$6.2 billion into Merrill Lynch’s coffers. Other firms buying equity investments in financial institutions in the United States and Europe include the Government of Singapore Investment Corporation in Citigroup and UBS, the China Investment Corporation in Morgan Stanley and Temasek Holdings in Barclays.
Due to the region’s relatively strong growth projections, the subprime crisis has potentially increased interest in Asia-Pacific’s assets. While not immune to the volatility in the global market, the ability of the region to be insulated from the subprime crisis would depend on the policy responses Asian economies would initiate to address the new challenges.
Expectations of more fluctuations in the global market is a challenge that need to be responded to swiftly and efficiently. Emerging markets in the region have not totally decoupled from the subprime issues; a significant proportion of Asia-Pacific exports are still destined for the US market. A slowdown in the US economy could lead to a reduction in domestic and export demand. Impact on emerging markets exports cannot be avoided although lessened.
Moreover, concerns about transparency in strategies and portfolio composition of national enterprises and private companies have spawned calls for a regulatory oversight of sovereign wealth funds. The subprime crisis has opened eyes to the failure of the international financial architecture to address the risks of new financial instruments.
Even as risk-management systems in the region have improved, they have not become fully matured. Regulators and CEOs of financial-services institutions in the region have concerns about the coordination of central banks, regulators, and government ministries – both within and among the region’s countries.
Recognizing that economic interdependence requires global cooperation, CACCI calls on national, regional and international organizations in charge of trade, development, financial-related issues and market regulations, and policymakers with economic responsibilities to strongly consider the following measures and initiatives:
- Formalize and intensify cooperation and interaction in coming up with solutions that cut across regulators and borders. CACCI encourages the adoption of a systematic approach that will effectively monitor and regulate financial institutions and markets. CACCI further calls for the improvement of the national and regional institutional frameworks to ensure transparency in information provision to financial markets and the adoption of common minimum standards in prudential regulations.
- Improve regional macroeconomic surveillance premised on Asia-Pacific Economic Cooperation (APEC) agenda and work toward the creation of regional institutions to undertake surveillance and related matters with the possibility of re-establishing and expanding the coverage of the Manila Framework Group (MFG) (note 4) and strengthening and similarly expanding the coverage of the ASEAN Surveillance Process (ASP) (note 5.) CACCI calls on a public-private sector initiative to implement an Asian forum for regional coordination as venue to share best practices, standards and information on making the structure, conduct, and performance of the financial system more transparent within and across countries and to develop regular crisis management policy and program initiatives.
- Strengthen the regulatory and supervisory role of Central Banks to enable them to promote an efficient and effective banking system. CACCI strongly calls for a regular coordination among Central Banks to enable them to take collective action to prevent the failure of the regional and global financial system. A coordinating mechanism among the Central Banks will help ensure that failure of one banking entity does not cause or result in the failure of others.
- Promote training and sharing of knowledge through the forging of stronger links between regulators in the region with established regulators such as the Bank for International Settlements (BIS) (note 6), the International Organization of Securities Commissions (IOSC) (note 7), and the International Association of Insurance Supervisors (IAIS) (note 8.)
- Establish regional monetary policy mechanism to make available adequate liquidity in times of crisis and provide contingency financing for countries in difficulties. CACCI calls the expansion of the Chiang Mai Initiative (CMI) (note 9) to become an Asia-Pacific wide financing arrangement to enable countries to cope with disruptive capital flows and maintain exchange rate stability.
- Build credibility by pursuing a sound macroeconomic policy, enforcing prudential regulations, and discouraging short-term external borrowings through price-based or quantitative capital controls.
CACCI calls for intensified advocacy to adopt risk management as a strategic discipline and not merely a regulatory compliance, particularly for financial institutions. CACCI supports initiatives for the holding of regional fora for sharing knowledge, skills and training and best practices on risk management so that professional organizations and regulatory bodies can formulate risk management framework and infrastructure responsive to current and future risks.
Recognizing that too much regulation may constrict the growth of the sector, CACCI further calls on regulators to ensure that the regulatory framework should be able to protect public interest and maintain market confidence, while at the same time facilitating the ability of a financial market to provide competitive financial products and services.
With the development of capital markets and the interdependence of the economic and financial system within countries and across borders, it will be necessary to deal comprehensively with the issue of a regulatory framework to enhance the capability of regulators to address challenges to the financial and economic systems. Such issues can be addressed only if the private and public sectors work together.
CACCI is confident that in the face of challenges arising from the financial crisis and threats of inflation, concerted efforts taken at the national and international levels would restore confidence in the market and sustain development not only at the regional but at the global level as well. October 23, 2008 22nd CACCI Conference Manila, Philippines.
Footnotes:
(1) Asia-Pacific Region is comprised of the countries of East and Northeast Asia (China, Japan, DPR Korea, Hong Kong, Macao, Mongolia, Republic of Korea), Southeast Asia (Brunei, Cambodia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Timor Leste, Vietnam), South and Southwest Asia (Afghanistan, Bangladesh, Bhutan, India, Iran, Maldives, Nepal, Pakistan, Sri Lanka, Turkey), North and Central Asia (Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyz tan, Russian Federation, Tajikistan. Turkmenistan, Uzbekistan), Pacific (American Samoa, Cook Islands, Fiji, French Polynesia, Guam, Kiribati, Marshall Islands, Micronesia, Nauru, New Caledonia, Niue, Northern Mariana Is, Palau, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, Vanuatu), Australia and New Zealand.
(2) UN-ESCAP Statistical Yearbook 2007.
(3) UN-ESCAP Economic and Social Survey of Asia-Pacific 2008.
(4) The MFG is a forum of Finance & Central Bank deputies from Australia, Brunei Darussalam, Canada, People’s Republic of China, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand and the United States. It was created in response to the Asian crisis with the objective of developing regional strategies to address the crisis based on improved surveillance and a strengthening of the IMF’s capacity to respond to crises. It was terminated in 2004.
(5) The ASP was founded in October 1998 by the ASEAN Finance Ministers to strengthen policymaking capacity within the ASEAN grouping. In addition to monitoring of exchange rates and macroeconomic aggregates, the ASEAN Surveillance Process monitors sectoral and social policies. It also includes provisions for capacity building, institutional strengthening, and sharing of information.
(6) The BIS is an international organization that fosters cooperation among central banks and other agencies in pursuit of monetary and financial stability.
(7) The IOSC is an organization that brings together the regulators of the world’s securities and futures markets.
(8) The IAIS works closely with other financial sector standard-setting bodies and international organizations to promote financial stability. It holds an Annual Conference where supervisors, industry representatives and other professionals discuss developments in the insurance sector and topics affecting insurance regulation.
(9) In response to the Asian Financial Crisis, the ASEAN+3 (China, Japan, Korea) Finance Ministers established the CMI to promote the establishment of a regional financial arrangement to supplement the existing international facilities. The CMI aims to create a network of bilateral swap arrangements (BSAs) among ASEAN+3 countries to address short-term liquidity difficulties in the region and to supplement the existing international financial arrangements.
