East Asia eyes the slump

Tuesday, October 7

South Korea's President Lee Myung-bak said yesterday that he will propose a summit with China and Japan on responding to the global financial crisis. His move comes at a time when governments across Asia are drawing lessons from the financial crisis, which, although not of their making, has implications for financial sectors in their countries and for their wider economies. 

• South Korea's financial sector is the most vulnerable of the three, with relatively high loan-to-deposit ratios and under pressure from the liquidity squeeze.

• Japanese banks appear relatively robust and exposed only to a limited degree, as are Chinese banks.

• However, slowdowns in partner economies are key concerns for all three economies.

Governments more widely in the region may well want to explore the potential for tighter coordination, at the same time as they look to toughen their regulatory regimes. They will have noted how far regulatory authorities in the most affected countries have been tested by the current crisis, and the responses taken in a bid to avert further instability.

Stability dialogue?

There is a growing consensus that much can and should be done to address weaknesses in Asian financial systems and differences in national financial regulation. Asian Development Bank (ADB) President Haruhiko Kuroda recently proposed the establishing of Asian Financial Stability Dialogue (AFSD), which would include finance ministry and central bank officials, financial regulators, supervisors and market participants. The proposed forum would use early-warning systems to improve surveillance of the region's financial markets.

A global Financial Stability Forum (FSF) already exists and operates under the auspices of the Bank for International Settlements, but this is seen as being concerned chiefly with preserving stability among major financial jurisdictions that are capable of having a systemic impact on global finance. Within Asia, only Tokyo and possibly a couple of offshore financial centres come within this category.

Outlook.

The proposal to set up a new regional forum as an adjunct to the FSF was considered at a recent South-east Asia, Australia and New Zealand (SEANZA) Governors' Symposium in Bangkok. Central banks from 20 countries -- including Japan, China, Australia, India and South Asian and South-east Asian countries -- agreed to review the idea further. Organisations such as SEANZA and the Executive Meeting of East Asian central banks (EMEAP) act only as consultative bodies; they do not have coordinating functions in the regulatory and supervisory areas where cooperation is felt to be necessary now, in the light of growing financial and economic integration within the Asia region.

The ADB argues that institutions capable of conducting meaningful surveillance and addressing common regulatory issues are essential and that this objective could best be served by a new and high-level AFSD on financial sector issues. It would operate in parallel with an Economic Review and Policy Dialogue (ERPD) that addresses macroeconomic cooperation among Asian governments. The AFSD would bring together all responsible authorities to address financial market vulnerabilities, regulations and efforts at integration, as well as engaging in dialogue with the private sector.