CSFI/PwC report warns of Asian banking risks

PricewaterhouseCoopers LLP Asia Financial Services Leader Dominic Nixon talks about the Banking Banana Skin Survey 2010 and what bankers in Asia fear the most.

Q. European banks have a shortage of liquidity; Asian banks have excess liquidity. How will this play out and what are some of the challenges for regulators?

The key thing is that, because of the way the Asian markets is set up, they don’t want too much liquidity in the local currency. And particularly, if you look at it from a global perspective, we want funds to move around the world in a relatively easy way. Too much liquidity, if that happens in the long term, that could have big effects on the markets going forward.

Going back to the first part of your question, they essentially bring fences around the banks to mean to say that, you know, liquidity in the country has to stay in the country and the banks can’t use their traditional methods of funding branches in other locations or other territories. And it’s gonna be very difficult for them to move around and therefore translate into other currencies.

Q. Can you tell us about asset bubbles and how they may affect banking in Asia?

Firstly I think it’s wrong to assume that asset bubbles or asset appreciation is a bad thing. I mean, asset appreciation which is done consistently over time assists economies grow, and governments and regulators will look to ensure that it happens. I think the issue more is regulators learning from the past, learning how to make adjustments to regulations so that when lending is made against assets, when asset-based lending is made and it’s done in a way where we understand the past, it’s done in a safe way and essentially the financial institutions are protected better going forward. It’s another advance on risk management particularly in the credit space. There’s plenty of evidence out there to suggest you can do asset-based lending in a safe way. It’s just a case of putting sensible regulation in place to ensure that the institution is protected against any potential downturn in the assets over a couple of economic cycles.

Q. What was the most interesting thing that came out of the Banana Skins Survey as it applies to Asian banks?

I think the most interesting thing is that Asian banks are concerned about political interference but are not overly concerned. At the end of the day the Asian banks came out of this thing pretty well, the regulators haven’t shifted that much. So I think the Asian banks are in a pretty good place, they’re still concerned a bit about political interference but generally that’s a Western or US type of issue that the bankers have.