Outlook of Economic and Financial Integration and ...€¦ · BANK NEGARA MALAYSIA CENTRAL BANK OF MALAYSIA Page 1 of 35 The South East Asian Central Banks (SEACEN) Research and Training

BANK NEGARA MALAYSIACENTRAL BANK OF MALAYSIA

Page 1 of 35The South East Asian Central Banks (SEACEN)

Research and Training CentrePage 1

Outlook of Economic and Financial Integration

and Financial Supervisory Systems in ASEAN

2014 Bank Examiners and Auditors Conference

Taiwan Academy of Banking and Finance

October 21-23, 2014

Taipei, Taiwan

The views expressed are solely of the author and do not necessarily reflect those of

the SEACEN Centre




Outline of Presentation

1. ASEAN Economic Community

2. ASEAN Financial Integration and Financial

Supervisory Systems





Goal of regional economic integration by 2015

A single market and production base

A highly competitive economic region

A region of equitable economic development

A region fully integrated into the global economy





A region with free movement of goods, services, investment,

labor and capital

ASEAN Economic Community (AEC) Blueprint: 13th ASEAN Summit in November 2007

Elements of AEC : to achieve high levels of economic dynamism, sustained prosperity, inclusive growth and integrated development

A. Single Market and Production Base

1. Free Flow of Goods

– ASEAN Free Trade Area (AFTA), Common Effective Preferential Tariffs (CEPT) : remove all NTBs by 2012 (ASEAN 5) , 2018 (CLMV)





2. Free Flow of Services

- 4 priority sectors: air transport, e-ASEAN, health care, tourism (2010), logistics (2013), all others (2015)

- Allow for foreign (ASEAN) equity participation of 70% by 2010 for priority sectors, of 70% by 2013 for logistics, of 70% by 2015 for all others

- For financial services, ASEAN Minus X Formula (first ready first proceed):

- i) Progressively liberalize restrictions in subsectors identified by each member by

- 2015

- Ii) Progressively liberalize restrictions in the remaining subsectors by 2020





3. Free flow of investment

- ASEAN Investment Area (AIA): all (manufacturing, agriculture, fishery, forestry,

mining, quarrying) shall be open, national treatment granted to

investors, except TEL(temporary exception list) and SL(sensitivity list). ASEAN

Investment Guarantee Agreement(IGA): investment protection

- ASEAN Comprehensive Investment Agreement (ACIA): forward-

looking, international best practices for investment protection,

facilitation and cooperation, promotion and awareness, liberalization

4. Free flow of capital

- Strengthening capital market development and integration:

- i) Achieve harmonization in capital market standards (offering rules for debt securities,

- disclosure requirements, distribution rules)





ii) Facilitate mutual recognition arrangement, cross recognition of qualification

iii) Enhance withholding tax structure

iv) Facilitate cross-border capital raising

- Allowing greater capital mobility

An orderly capital account liberalization consistent with national agenda and readiness of the economy

Adequate safeguard against potential macroeconomic instability and systemic risk

i) Remove or relax restrictions to facilitate the flows of payments and transfers for current account transactions

ii) Remove or relax restrictions on capital flows (FDI, etc.)





5. Free flow of skilled labor

Allow for managed mobility or facilitated entry for the movement of labor

i) Facilitate the issuance of visa and employment of passes

In facilitating the free flow of services (by 2015), work towards

harmonization and standardization

i) Among ASEAN University Network(AUN) members, increase mobility

for both students and staff

ii) Develop core competencies for skills in service sectors

Iii) Strengthen the research capabilities in terms of promoting skills, job

placements, and develop labor market information network





6. Priority Integration Sectors

12 priority sectors identified for accelerated integration with a road map for each, which combines specific initiatives of the sector and the broad initiatives across sectors

i) Conduct a biannual review to monitor and ensure the timely implementation of

the PIS

ii) Identify sector-specific projects or initiatives through regular dialogues or

consultation with stakeholders

7. Food, agriculture and forestry

Enhance intra- and extra-ASEAN trade and long-term competitiveness of FAF products





Promote cooperation, joint approaches and technology transfers

Promote ASEAN agricultural cooperatives to enhance market access, to build a network, and to fulfill the benefit of farmers

B. Competitive Economic region

1. Competition policy

To foster a culture of fair competition, institutions and laws related to competition policy have been established in some AMCs

i) Endeavor to introduce competition policy in all AMCs by 2015

ii) Establish a network to serve as a forum for coordinating competition policies





2. Consumer protection

Consumer protection measures are already developed in tandem with proposed

economic measures

i) Establish the ASEAN Coordinating Committee on Consumer Protection(ACCCP)

ii) Establish a network of consumer protection agencies and organize regional training courses

3. Intellectual property rights (IPR)

To develop a culture of learning and innovation, the ASEAN IPR Action Plan

2004-2010 and the Work Plan for ASEAN Cooperation on Copyrights

implemented

i) Accession to the Madrid Protocol, where appropriate





4. Infrastructure development

Transport cooperation: For multi-modal transport and transport

facilitation, the ASEAN Transport Action plan(ATAP) implemented

i) ASEAN Framework Agreement on the Facilitation of Goods in Transit (by 2009), on

Multimodal Transport (by 2010) and on the Facilitation of Inter-State Transport (by

2008) have been implemented

Land transport: the Singapore-Kunming Rail Link(SKRL) and the

ASEAN Highway Network(AHN) projects

i) Develop all the missing links in SKRL and complete road construction and improve

below Class III road sections of the AHN





Marine and air transport: Develop the ASEAN Single Shipping Market and

implement the ASEAN Single Aviation Market

Information Infrastructure: Develop high-speed inter-connections among

national information infrastructures(NII) and improve trust and confidence

in the use of the internet and security of electronic transactions, payments

and settlements

Energy and mining cooperation: implement 14 electricity interconnection

projects and 7 gas interconnection projects

Financing of infrastructure projects: promote participation of private sectors

and international organizations in financing regional infrastructure

development




1. ASEAN Economic Community 5. Taxation

Complete the network of bilateral agreements on avoidance of double

taxation by 2010

6. E-Commerce

Implement the e-ASEAN Framework Agreement

C. Equitable Economic development

1. SME development

i) The ASEAN Policy Blueprint for SME development (APBSD) 2004-2014 implemented

ii) Promote networking of SMEs and build regional production and distributions network




1. ASEAN Economic Community 2. Initiative for ASEAN Integration (IAI)

The IAI covers the priority areas, infrastructure, HR development, ICT,

capacity building for regional economic integration, energy, investment

climate, poverty reduction and improvement of the quality of life

Meet the AEC challenge and help CLMV develop policy to enhance economic

growth, strengthen economic competitiveness, increase investments,

expand private sector enterprises

D. Integration into the Global Economy

1. Coherent Approach towards External Economic Relations

Maintain “ASEAN Centrality” in its external economic relations including its

negotiations for FTAs and Comprehensive Economic Partnerships(CEPs)





2. Enhance participation in global supply networks

i) Adopt international best practices and standards in production and

distribution

ii) Develop a comprehensive package of TA for BCLMV





Supervisory Systems

A. Areas of Financial Integration

Financial services liberalization, including banking integration

i) Gradually remove restrictions on providing financial services in other regions, considering the readiness of the member economies by 2020

ii) Qualified ASEAN Banks (QABs) accorded equal treatment as the domestic banks

Capital account liberalization

i) Gradually remove restrictions on forex transactions in the CA, FDIs, PIs and Ofs,

while imposing adequate safeguards





Supervisory systems

Capital market development

Implement harmonization of domestic laws and regulations and linkage of

market infrastructure:

i) Linkage of 3 Exchanges (Malaysia, Singapore, Thailand)

ii) Harmonization of cross-border primary offerings of securities under ASEAN Disclosure Standards ( M, S, T)

iii) Reduce the review timeframe of secondary listing application

iv) Launch the ASEAN Corporate Governance Scorecard

v) Develop the Bond Market Development Scorecard

Harmonize payments and settlements systems





supervisory SystemsB. Where the region stands?

Banks

Commercial banks account for 82% of total financial assets (For BCLMV, 98%);

Average CAR is higher than 15%, nonperforming loan ratio is less than 5%;

Average size of assets is $4.8 billion (World’s 500 is $14 billion) but large differences

in size ($14 billion in S and M, $10 billion in T, less than $3 billion in others);

Among the top global 100, 3 Singapore and 1 Malaysian banks included;

Non-banks

Lending and borrowing is limited to a particular geographic area or a particular type

of activity (eg, financing for medium sized companies);

Foreign companies’ market share is as high as 40%:





Supervisory SystemsRegional Financial integration: still initial stage

Banks

i) Not a single ASEAN based bank has either a branch or a subsidiary in all member states; 3 banks (Maybank, Bangkok Bank, UOB) have operations in 7 members;

ii) SC Bank has subsidiaries in 7 members and rep offices in 3 members; Citibank and HSBC have subsidiaries in 7 members

iii) ASEAN banks still fall short of national regulatory standards compared with foreign banks

Portfolio investment flows

i) Intra-ASEAN portfolio investments are small; Singapore (84.2%) and Malaysia (12.1%) are the two largest investors





Supervisory Systems

Principles of ASEAN financial liberalization

i) Liberalization through the “ASEAN minus X” formula

ii) Respect for national policy objectives and disparity in economic and financial development

iii) Flexibility in setting preconditions and timelines

iv) Adherence to internationally recognized standards of financial regulation

v) Adoption of adequate safeguards, including the right to uphold the regulatory discretion of the national authorities in taking the necessary measures





Supervisory Systems

Degree of banking market integration

i) The ratio of bank assets to GDP is expected to rise steadily but slowly due to the segmentation of banking markets; Several members not only strictly regulate the entry of foreign banks but also impose restrictions on the operations of foreign banks

ii) In 3 states (Malaysia, Philippines, Thailand), domestic banks account for 82%; The share of ASEAN-based foreign banks is highest in Malaysia at 8.5%, 3.7% in Thailand, 0.4% in Philippines

iii) A carefully planned market integration process can help more ASEAN-based banks develop faster than non-ASEAN based counterparts; if integration implemented successfully, the share of ASEAN-based banks in 3 members will begin to accelerate from 2015 and will triple by 2025 or 2030

Barriers to integrationi) ASEAN-wide integration requires regulatory harmonization, but with many states at

different stages development, it is a daunting task





Supervisory Systems

6 categories of regulatory systems; considerable differences

i) entry and licensing ii) capital stringency iii) supervision iv) empowerment

for PCA v) restrictions on risk management procedures vi) transparency

Many banks fail to pass the convenience and needs test and the licensing

terms that require highly advanced technology;

ASEAN-based banks are less likely to have high level of development in

infrastructure or internal management systems

Benefits and risks

i) Enlarge the customer base and create economies of scale and efficiency, thereby

increasing total factor productivity and accelerate growth





Supervisory systems

ii) Banking market integration will make the banking system more resilient and

promote closer cooperation in fighting against potential threats to economic stability

However,

i) The entry of foreign banks can expose the domestic banking market to the spillover effect of difficulties encountered by foreign banks in their home countries

ii) The freedom of cross border transactions may embolden speculative activities by foreign banks, thereby destabilizing the economy

iii) Cross border banking integration includes the possibility that domestic banking market is eventually dominated by foreign banks

C. 3 dimensions of the banking integration

Equal environment (segmented regional market full regulatory harmonization and

capacity building)





Supervisory Systems

i) harmonization of banking regulation: key areas of concern:

bank account standards and disclosure requirements, minimum

capital requirements, risk managements, PCA and resolution

methods for failed banks, restrictions on large exposure, anti-

money laundering and consumer protection

ii) institution building: national credit rating agencies, credit guarantee

facilities, interbank markets

Equal access (elimination of entry barriers)

i) minimum qualifications include capital adequacy requirements,

consolidation requirements and authority for consolidated supervision,

restrictions on large exposure, accounting and transparency

requirements





Supervisory Systems

Equal treatment (elimination of discrimination against foreign banks)

i) The process of granting equal treatment to all banks should be based on their risk profile




2. ASEAN Financial integration and Supervisory

Systems

New tasks for effective ASEAN financial supervisory systems

i) Regulations to mitigate the risk exposure stemmed from cross border financial transactions

ii) Risks travel not only through the foreign exchange markets but also through the capital market and local currency money market

iii) Increased emphasis on the importance of cross-border financial supervision requires access to information from a financial institution outside jurisdiction; dialogue ties with G 20, BCBS, FSB are critical

iv) Recent GFC reminded that micro- and macro-prudential approaches have to be combined together; incorporate macro-prudential surveillance into the financial supervisory framework and combine with the micro-prudential setup; open a communication channel among national supervisory bodies (when there are more than one, eg, Indonesia)





Supervisory Systems

v) In the regional level, develop information sharing mechanism among supervisory

bodies and establish channels for communication to support the early warning

system and crisis alert mechanism and develop crisis management mechanism

Main characters of ASEAN financial supervision and regulation

systems

i) The dominance of the banking system due to asymmetric information problems

ii) Transparency and disclosure policy are areas to be improved in bond markets

iii) Household sectors have low exposure to the financial markets and low investment demand for bond investment

iv) Most countries are tuned to Basel II framework, and some countries still follow CAMELS(capital, asset quality, management, earning, liquidity and sensitivity to risks), while some moved on to the risk-based supervision





supervisory systems

v) In most countries, the central bank has the sole authority of the banking

supervision (integrated approach)

vi) Some central banks have the authority only on the banking system not on the

entire financial sector (functional approach or institutional approach), the fact that

there is a possibility of multiple institutions sharing authorities in different parts of

the system makes the comprehensive and consolidated assessment of a financial

institution more complicated

vii) Regional safety net was strengthened after the Asian crisis, including

CMIM(Chiang Mai Initiative Multi-lateralization) and ERPD(Economic Review and

Policy Dialogue)

Some issues in macro-prudential approach

i) The top down stress tests should cover not only country-level data but also global financial indicators including the global financial markets and G-SIFIs





Supervisory Systems

ii) Regional regulators should also pay attention to the unthinkables, such as risk

concentration, trading liquidity risk, geopolitical situation, risk premium of a country

iii) The difficult part in the bottom up stress tests is to decide which institutions to

start; it is important to keep the definition of SIFIs dynamic according to the crisis

situation,

this requires the knowledge of the financial system and the sensitivity to recognize

the crisis transmission channels: product exposure approach (financial instruments

and institutional linkages), business exposure approach (corporate sector) and

retail approach (household sector)

Issues in inter-regional arrangement

Most ASEAN members allow for close to full ownership of foreign banks, and access

to information needs to be a two way in the Supervisory College




Thank You

Q & AFor e-mail enquiries: [email protected]

Documents

Outlook of Economic and Financial Integration and ...€¦ · BANK NEGARA MALAYSIA CENTRAL BANK OF MALAYSIA Page 1 of 35 The South East Asian Central Banks (SEACEN) Research and Training