ADB pushes for reforms for ASEAN bank integration

ADB says reforms in the banking sector to facilitate the free flow of capital in the region

MANILA, Philippines – To speed up financial integration in the Association of Southeast Asian Nations (ASEAN), the Asian Development Bank (ADB) pushed for reforms in the banking sector in a new report released on Wednesday, April 3. 

In the report released at the 9th ASEAN Central Bank Governors’ Meeting in Brunei Darussalam, Manila-based ADB said these reforms must be undertaken through a two-track approach: one for the 5 original members, the ASEAN-5, and 5 newcomers, BCLMV. 

The countries that compose ASEAN 5 are Indonesia, Malaysia, the Philippines, Singapore, and Thailand. The BCLMV countries are Brunei Darussalam, Cambodia, the Lao People’s Democratic Republic, Myanmar, and Viet Nam.

“ASEAN’s banking market has so far seen little integration. Although the ASEAN 5 states have taken steps to open up their banking industry, cross-border banking and the cross-border penetration of ASEAN-based banks within ASEAN have been slow to develop,” ADB said.

“In 2010, not a single ASEAN-based commercial bank had either a branch or a subsidiary in all ASEAN member states. The three ASEAN banks with the widest regional presence – Maybank of Malaysia, Bangkok Bank of Thailand, and United Overseas Bank of Singapore – have operations in seven ASEAN member states,” it added.

ADB said 2009 data showed that the combined market shares of domestic and foreign banks in Malaysia, the Philippines, and Thailand accounted for 82% of the total commercial bank assets, on average, while the share of foreign banks was 18%. 

The report added that the share of ASEAN-based banks in Malaysia, at 8.5%, was the highest among the three while the Philippines had the lowest at 0.4% in 2009. ASEAN-based banks in Thailand was at 3.7% in 2009.

“If the integration plan proposed in this study is successfully implemented, the share of ASEAN- based banks will begin to rise faster from 2015 in Malaysia, the Philippines, and Thailand— countries with rather high entry barriers—and will triple by 2025 or 2030,” ADB said.

Needed reforms

These reforms are encompassed in an ASEAN banking framework that will allow ASEAN banks to enter and operate in banking markets in other ASEAN member states. 

The framework suggests that the target to be achieved by 2020 is not a fully integrated regional market but a semi-integrated one. To achieve significant progress by 2020, ADB said compromises must be made. 

These compromises are that:

  1. only a small number of high-quality banks that meet specific qualifications will gain access to the banking markets in all member states;
  2. some within-market restrictions that may hinder free cross-border expansion will remain at the discretion of the host member state; and
  3. progress in the subdimension of regulatory harmonization will be slow, except in several key areas such as the criteria for prompt corrective action (PCA).

Among the reforms that ADB is batting for is on Capital Account Liberalization (CAL) which it considers as key to creating an integrated economic region such as the ASEAN Economic Community (AEC) or the ASEAN single market in 2015. 

ADB said CAL is a process that removes legal and administrative impediments to businesses in transferring “ownership claims across national borders.” 

In the context of ASEAN, the ADB said under CAL, businesses from member-states will be allowed to invest in or borrow funds freely from other member states without any legal or administrative formalities. 

“Even if capital is substantially allowed to move across national borders, as is the case in many ASEAN countries, capital mobility is still considered not free if it is subject to control in the form of permission, ex ante reporting requirements, or quantity restrictions even if permission is generally granted. Capital is not freely mobile when there is a lag between the time a decision is made to transfer funds abroad and the time the transfer can be made,” ADB said.

Drag in trade?

The lack of financial integration has prevented the ASEAN to fully benefit from trade openness. ADB said intra-regional trade in the ASEAN is at 24.5% of the region’s total trade in 2009, lower than the 49% in the European Union15.

The original EU15 countries are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom. 

The ADB said that the rapid growth of the external sector and Gross Domestic Product (GDP), however, the share of intra-regional trade has increased, from 21.3% in 1994 to 24.5% in 2009. 

To a large extent, ADB said this increase reflects ASEAN’s active promotion of freer trade with its neighboring countries in recent years. 

ASEAN has concluded negotiations for five free trade agreements with the People’s Republic of China (PRC), India, Japan, the Republic of Korea, and Australia plus New Zealand. 

“These trade agreements may further increase ASEAN’s intra-regional trade as a proportion of total trade,” the ADB said. –

The Road to ASEAN Financial Integration

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