Challenges Await the ASEAN Banking Integration Framework

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By Matthew Davis

Nov. 4 – Following periods of regional instability resulting from the 1997 Asian financial crisis and the recent global financial crisis, there has been great impetus for establishing a pan-ASEAN banking presence.

In promoting such financial integration, the ASEAN nations hope to capitalize on economies of scale, a larger consumer base and cooperative transfers of technology and information to achieve long-term goals of competitive finance, regional economic growth, geopolitical empowerment and capacity to withstand external shocks and mitigate contagion risk.

With this in mind, the governors of the ten central banks hope to ratify the ASEAN Banking Integration Framework (ABIF) by the end of the year. The ABIF seeks to apply the principles of the ASEAN Single Market – that is, the “three dimensions” of equal access, equal treatment and equal environment – to a regional banking industry. This process would entail uniform regulation, financial infrastructure building, developing the banking capabilities of the less developed “BCLMV” countries (Brunei Darussalam, Cambodia, Laos, Myanmar, and Vietnam) and installing a network of “qualified ASEAN banks” to operate in all countries in the region.

But such integration continues to be a contentious and gradual process. For one thing, the standardization of financial regulation naturally creates a tradeoff between financial stability and autonomous monetary policy, which strikes at the heart of national sovereignty.

As Raden Pardede, chief economist at the Indonesian General National Bank, asked a local newspaper: “In times of crisis, would the Singaporean government be willing to bail out a Malaysian bank?”

Furthermore, pervasive intra-ASEAN rivalry can be a barrier to integration efforts. National banks, such as Indonesia’s Bank Mandiri and BNI, have claimed opposition to their expansionist efforts, particularly into Singapore and Malaysia.

“Some countries in ASEAN would rather see a European bank do well in their country than a Malaysian bank,” said Nazir Razak, chief executive at Malaysia-based bank CIMB.

Another criticism of the integration process is the absence of sufficient financial safety nets. The Chiang Mai Initiative Multilateralization (CMIM) was launched in March 2010 as a regional currency swap facility between the ASEAN+3 economies that is devoid of IMF conditionality. But even with its doubling in size in 2012 to $240 billion, the pool of foreign reserves is still quite shallow, falling far short of the sums required from the IMF during the Asian financial crisis.

At 1.5 percent of member GDP, the CMIM pales in comparison to the Eurozone equivalent which is worth 8 percent of its members’ GDP.

Another concern is the differentiated impact of integration, creating winners and losers in its wake. Naturally, liberalized financial markets will direct capital flows to the more politically stable, developed, and legally reliable countries and empower those banks with better-developed and advanced infrastructures.

In its Road to ASEAN Financial Integration report, the Asian Development Bank (ADB) cautioned that “cross-border banking integration does not exclude the possibility that the domestic banking market will eventually be dominated by foreign banks.” Such a trend will disproportionately benefit firms from Singapore, Malaysia, and Thailand – countries already approaching the limits of internal growth.

Perhaps for this reason, these three countries have led the process of establishing pan-ASEAN presences. CIMB, for example, has a presence in all ASEAN countries except for Laos. Maybank, the United Overseas Bank of Singapore and the Bangkok Bank of Thailand have a presence in seven ASEAN countries.

Outside of the banking industry, Thai beverage company ThaiBev, Malaysia’s AirAsia and Singaporean-Malaysian healthcare union ParkwayPantai have all expanded intra-regionally. In addition, Singapore (84.2 percent in 2009) and Malaysia (12.1 percent) are by far the largest intra-ASEAN portfolio investors of the ASEAN-5 countries.

The situation puts the region’s largest economy in an awkward position. Indonesia’s underdevelopment and relative un-competitiveness have made protectionism its primary response to regionalization efforts. Indeed, an Economist Intelligence Unit survey of multinationals in the region found that Indonesia and Myanmar are considered the most closed ASEAN economies.

Historically, the country has sought to preserve domestic dominance by placing stringent limits on foreign ownership of banks and mining companies, pushing for trade protectionism, and limiting foreign equity participation. Such policies conflict with the ASEAN mission of promoting intra-ASEAN financial liberalization.

Finally, national bank executives are awaiting a final “master plan” from the ASEAN Secretariat. Because the ABIF is still in the drafting process, much of the integration process has been put on hold or only modestly implemented ahead of an official decree.

Despite these challenges, continued perseverance is in the best interest of the ASEAN bloc, according to the Asian Development Bank.

“The integration of the banking market will substantially benefit ASEAN,” said the ADB in a report released last March.

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