In a decisive step toward ASEAN banking
integration, central bank governors from around the region came together in
early April 2011 to endorse the ASEAN Banking Integration Framework (ABIF).
This
framework is part of the ASEAN Economic Community Blueprint, which promises to
bring economic benefits and financial stability to individual countries and the
region through multilateral liberalisation by 2015.
Flexibility
is key to this process, and so a double-track implementation plan has been
adopted for the ASEAN 5 (Singapore, Malaysia, Thailand, the Philippines and
Indonesia), and BCLMV countries (Brunei Darussalam, Cambodia, Laos, Myanmar and
Vietnam).
Authorities
from the 10 central banks agreed upon four preconditions to ensure the banking
integration framework is successfully implemented. The first is harmonisation
of regulations. The second is building financial-stability infrastructure. The
third is assisting the BCLMV countries to build their banking capacity. The
fourth is establishing set criteria for ASEAN qualified banks to operate in any
ASEAN country with a single ‘passport’.
Yet
even at this early stage, the integration framework has sparked many crucial
debates.
The
first is about the definition of integration and its benchmark indicators. Banking
integration can be measured by price-based measures or quantity-based measures.
When calculating banking integration, the ASEAN Framework Agreement on Services
(AFAS) currently takes four factors into account: cross-border bank flows,
consumption abroad, the presence of commercial banks, and the movement of
people. But ABIF’s concept of integration is restricted to only the commercial
presence of qualified banks, which it takes as the benchmark for ASEAN banking
integration by 2020. This is highly debatable because it will not necessarily
reflect the success of ABIF in bringing about economic benefits and financial
stability.
Another
issue is the preconditions set down in the banking integration framework, which
appear to contradict AFAS’s promotion of services liberalisation. There are
concerns that ABIF may increase regulatory and prudential barriers instead of
promoting banking liberalisation. But there is no ground for such concerns: the
framework provides both the ‘soft infrastructure’ (harmonised regulation) and
‘hard infrastructure’ (financial-stability infrastructure) needed to
consolidate banking integration.
There
is also the matter of benefits, opportunities, costs and risks associated with
the framework itself. It is passé to think that financial integration is always
good. But ASEAN banks have learned a lot from the European banking crisis and
they will likely apply these lessons in designing the association’s own banking
integration platform. In the short term, ABIF should deliver its promise to
facilitate economies of scale, a bigger market, technological transfer and
information sharing. In the long term, it should assist in establishing
stronger regional growth and accelerate poverty reduction. At the same time,
the framework should help minimise systemic risks, contagion effects and
financial instability.
Another
key debate centres on strategies to maximise the opportunities and minimise the
risks of banking integration. ASEAN should thus accelerate plans to put a
regional financial safety net in place. The current ASEAN+3 Chiang Mai
Initiative Multilateralisation (CMIM) is not yet operational and is riddled
with inconsistencies. For example, the likely donor countries (China, South
Korea and Japan) are still reluctant to uncouple the CMIM from the IMF because
they will have a greater responsibility to bail out troubled countries.
ASEAN
should also consider the differentiated impacts of banking integration on the
ASEAN 5 and BCLMV countries. There remain wide gaps in some areas of regulation
and financial-stability infrastructure. To date, cross-border bank lending
flows more often to politically stable, less-corrupt countries with efficient
government policies and legal protection. Unless the framework is improved,
integration may not result in capital flowing to less-developed countries with
generally poorer institutional qualities.
Yet
another crucial debate is how Indonesia should position itself. At 99 per cent,
its foreign equity participation (FEP) limit is one of the highest in the
region. It is natural that Indonesia should want to protect its domestic
market, demand reciprocal treatment and even revert its FEP. On the one hand,
some believe that Indonesia should prioritise its domestic interests by
protecting its domestic market until its banks can compete domestically and are
able to penetrate foreign markets. On the other hand, it is argued that
Indonesia should fully support the acceleration of ABIF even before attaining
this level of competitiveness, with the attendant risk of losing its market to
foreign banks.
Regardless
of which stance Indonesia takes, there are several foregone conclusions. First,
soundness and credibility of domestic policies are not substitutes for regional
commitments even though, at times when domestic policies are ‘stuck’, regional
commitments can help to ‘tie hands’ and exert external pressure. Second,
authorities should not impose strict benchmarks on integration. Instead, they
should facilitate and encourage it, while allowing the market to work freely.
Third, regardless of whether the banking integration framework is itself
successful, it will result in the ASEAN banking sector being more integrated,
for the simple reason that it will have reduced dependence on European and
American markets. The conclusion is clear: ASEAN countries should welcome this
latest step toward banking integration and prepare accordingly.
Joko
Siswanto and Maria Monica Wihardja
Business & Investment Opportunities
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