As a part of the ASEAN Economic Community
Blueprint, ASEAN central bank governors endorsed the ASEAN Banking Integration Framework
(ABIF) on April 7, 2011.
It is based on four guiding principles:
Bringing economic benefits and financial stability to individual countries and
the region; allowing flexibilities by adopting a double-track implementation
for ASEAN5 — Singapore, Malaysia, Thailand, Philippines and Indonesia — and the
BCLMV — Brunei, Cambodia, Laos, Myanmar and Vietnam; and achieving multilateral
liberalization by 2020, measured by the number of commercial banks present in
ASEAN.
To
ensure a successful implementation of the ABIF, four conditions have been
agreed upon. First is the harmonization of regulations. Second is the building
of financial stability infrastructure. Third is providing capacity building for
the BCLMV. Fourth is setting up agreed criteria for ASEAN Qualified Banks (QAB)
to operate in any ASEAN country with a single “passport”. For the 2011-2013
period, the ABIF is co-chaired by Malaysia and
Indonesia.
In this
early stage, the ABIF invites a lot of crucial debates. The first is about the
definition of “integration” and its benchmark indicators. Essentially, banking
integration can be measured by price-based measures using the law-of-one-price
hypothesis (e.g. convergence of retail interest rates) or quantity-based
measures (e.g. commercial presence, cross-border bank flows, foreign bank
assets-to-GDP ratios and market share of foreign banks in domestic markets).
In the
language of the ASEAN Framework Agreement on Services (AFAS), banking
integration can be measured by cross-border bank flows, consumption abroad,
commercial banks presence and the movement of natural persons. Currently, the
ABIF concept of integration is the commercial presence of QABs and it has
become the benchmark. This is highly debatable. Is a commercial bank’s presence
a measure of banking integration that indicates how much the ABIF has brought
about economic benefits and financial stability?
The
aforementioned conditions may look contradictory to the AFAS, which promotes
services liberalization. It may look contradictory since the ABIF may increase
regulatory and prudential barriers instead of promoting banking liberalization.
But, we see the ABIF as “AFAS+”. While the AFAS promotes banking
liberalization, the ABIF provides the “soft infrastructure” (harmonized
regulation) and “hard infrastructure” (financial stability infrastructure).
Then
there are the benefits, opportunities, costs and risks of the ABIF. It is passé
to think that financial integration is always good. To think this way only
brings a “feel-good” effect. ASEAN banks have learned a lot from the European
banking crisis and the same should apply to banking integration.
In the
short term, theoretically, the ABIF should bring the promised benefits of
economies of scale, a bigger market, technological transfers, information
sharing and the costs of “tied hands” — the inflexibilities to respond to
domestic issues.
In the
long term, the ABIF should bring opportunities to achieve stronger regional
growth and accelerate poverty reduction, and reduce systemic risks, contagion
effects and financial instability. A comprehensive study to assess the
trade-off between the benefits and opportunities and the costs/risks is
urgently needed.
There
are also the strategies to maximize the benefits and opportunities and minimize
the costs and risks. We think that ASEAN should accelerate the operation of a
regional financial safety net. The current ASEAN+3 (ASEAN, China, South Korea
and Japan) Chiang Mai Initiative Multilateralization (CMIM) is not yet
operational and possess a lot of inconsistencies.
For
example, the likely donor countries (the +3 countries) are still reluctant to
de-link the CMIM with the International Monetary Fund, because they would
otherwise carry a bigger burden to bail out troubled countries. Besides, the
CMIM only deals with crisis prevention and resolution, not crisis management
protocols.
ASEAN
also should be re-thinking the differentiated impacts of the ABIF on ASEAN5 and
the BCLMV. The ABIF stock-take has shown that there are wide gaps in some areas
of regulations and financial stability infrastructure. Some studies have also
shown that cross-border bank-lending flows to countries with better political
stability, less corruption, more efficient government policies and high-quality
legal systems.
Moreover,
less financially developed countries may not be able to bail out large
international banks, deterring international banks from entering those markets.
Hence, integration may not result in capital flowing to less developed
countries with generally poorer institutional qualities.
ASEAN
should learn from the success stories of member countries.
The
last crucial debate is how Indonesia should position itself. With its large
domestic market, the rising number of middle-class and profitable banks,
Indonesia is “sexy”. Its foreign equity participation (FEP) limit, according to
the existing regulation, is one of the highest in the region, 99 percent.
It is
natural that Indonesia wants to protect its domestic market, demand reciprocal
treatments and even revert its FEP. On one side of the spectrum, Indonesia
should prioritize its domestic interests, such as by protecting its domestic
market until it increases its banking competitiveness to compete domestically
and be able to penetrate foreign markets. On the other side, Indonesia should
fully support the acceleration of the ABIF even before it increases its banking
competitiveness and hence, may lose its market to foreign banks.
Regardless
of which stance it takes, we believe that there are a few foregone conclusions.
First, the soundness and credibility of domestic policies are no substitutes
for any regional commitment, although at times when domestic policies are “stuck”,
regional commitments can help to “tie hands” and place external pressures.
Second,
authorities should not rubber-stamp how integration works since it will not be
sustainable. Instead, they should facilitate it, but still let the market work
without imposing a strict benchmark.
Third,
regardless of whether or not the ABIF will be successful, the ASEAN banking
sector will be more integrated, especially since it can reduce dependence on
the European and American markets. Hence, there is no excuse for ASEAN
countries to not prepare for this.
Joko
Siswanto
Joko Siswanto is a senior researcher at Bank
Indonesia. Maria Monica Wihardja is a researcher at the Centre for Strategic
and International Studies and a lecturer at the University of Indonesia. She is
currently on leave to work as a consultant for Bank Indonesia. These views are
personal.
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