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The Asian Banker
Discussion Point
“Avoiding the Icelandic crisis – the Asian
response”
Emmanuel Daniel
President & CEO
The Asian Banker
Copyright The Asian Banker 2009. All rights reserved
1
I hope to discuss…
• The Icelandic crisis
• The evolution of the financial services industry
• The changing nature of the largest and
strongest financial institutions
Copyright The Asian Banker 2009. All rights reserved
2
Iceland: Timetable for disaster
1997
Total equity of
banking
system only
23b isk (7.3%
of GDP) and
assets
97% of GDP
Kaputhing
2002
Privatisation of
banking system
FSA not happy
with
privatisation of
Landsbanki – to
be owned by
leveraged
company with
govt providing
70% financing
Private sector
debt:equity ratio
150-200%
2003
2004
Rise of
Massive
domestic
capital
intensive consumer
lending –
power
domestic
projects
asset
inflation, rise
in cost of
funds and
attraction for
foreign carry
trade
2005
Govt virtually
free of foreign
publc debt AAA
rating
But top 3 banks
issued Eur15 b
of new debt
larger than GDP
Kaupthing’s
asset size 2.5
times Iceland
Reduced tax
rate
Equity market
booming
Source: Why Iceland, Asgeir Jonsson
Glacier bonds
2006
“This is not a
bank, but a
hedge fund” –
on Kaupthing
Bank
2007
Massive
capital
intensive
power
projects
The rise of
trading in CDS
Iceland
melting
SK in fre fall
Opportunity to
/ CDS
short Icelandic spreads 100
banks
bp
Drobny attack
on isk
2008 – 90% of
equity market
wiped out
“How can a
highly leveraged
country be AAA
rated?”
Recipe for disaster
• Quantitative easing of monetary policy
– Aggressive expansion of international wholesale markets
– End of capital controls
– Tax reduction
• No concept of leverage esp if funding is cheap and tax
regime is low
• Overheating of economy
– Massive capital intensive power projects
• Privatised and leveraged banking system
• Carry trade
Copyright The Asian Banker 2009. All rights reserved
4
There were in fact, three crises that happened simultaneously
•AIG and HBOS have been bailed
out;
•Morgan Stanley share price fell
30%
September
15
•Lehman Brother filed
for bankruptcy;
•Merrill Lynch was
sold to BoA
17
18
•FSA rescued Bradford&
Bingley after the company’s
market value shrunk 90%
21
22
•Black Friday:
•Nikkei Index fell 10%, biggest drop in 20 years;
•FTSE also suffered the worst daily crash since
1987;
•Singapore was the first Asian country in
recession
•Ireland became the first
nation in Euro zone to enter
recession
25
October
1 to 9
26
•Russian, Indian markets
•Washington Mutual was
experienced wild fluctuation; •Morgan Stanley and
•US, UK and other nations Goldman Sachs converted sold to JP Morgan Chase
to traditional bank holding
for US$1.9billion;
banned short selling
companies
•Many major banks in US
and Europe saw their
shares plumped
10 11---Now
•US Treasury US$700 billion •Systematic bail-outs
rescue plan ;
world wide;
•UK Treasury ￡500 billion •Markets rallied after
bail-out package ;
the release of joint•The nationalization of three
efforts rescue
largest Icelandic banks;
package worth
•Simultaneous interest rate US$2,546bn from EU
nations.
cut by six central banks
Markets Crisis
Banking Crisis
Economic Crisis
Source: Asian Banker Research
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5
What was the Icelandic crisis – the lack of
coordination between government, prudential
and systemic regulators
The Banking
Regulator
The
Government
The Central
Bank
The Icelandic
FSA
The Banking Sector
The Corporate Sector
Source: Asian Banker Research
The relationship between the government, prudential and
systemic regulators is so different in each country
Copyright The Asian Banker 2009. All rights reserved
7
The current prognosis is that the banking systems in
Asia are generally of sustainable size, although…
Banking Assets as a Proportion of GDP
1400%
1200%
1000%
800%
600%
400%
200%
0%
Source: Asian Banker Research
Banking assets as a % of GDP tell a different story in each
Asian country
300%
Assets as % of GDP
250%
200%
150%
100%
50%
0%
Singapore
Australia
Philippines Sri Lanka
India
Pakistan
Indonesia
Source: Asian Banker Research
Copyright The Asian Banker 2009. All rights reserved
9
Some observers think that emerging Asia is particular
vulnerable to credit risk dangers more than systemic risks
Foreign Financing
Banking System Imbalances
Danger of domestic credit risk
Domestic Leverage
Source: TAC Consulting
Size and sophistication of the consumer credit market is growing
dramatically across the Asia Pacific region
Hong Kong
China
Current market size: $115bn
South Korea
Current market size: $475bn
Potential market: $170bn
Current market size: $600bn
Potential market: $790bn
Potential market: $2350bn
Japan
Current market size: $1800bn
Potential market: $2000bn
India
Current market size: $130bn
Potential market: $800bn
Taiwan
Thailand
Current market size: $220bn
Current market size: $25bn
Potential market: $310bn
Potential market: $180bn
Vietnam
Malaysia
Current market size: $5bn
Current market size: $100bn
Potential market: $40bn
Potential market: $130bn
Singapore
Current size
Potential size
Current market size: $105bn
Potential market: $120bn
Source: Asian Banker Research
Indonesia
Australia
Current market size: $32bn
Current market size: $560bn
Potential market: $300bn
Potential market: $650bn
Copyright The Asian Banker 2009. All rights reserved
Philippines
Current market size: $11bn
Potential market: $100bn
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The elements do not necessarily behave the
way you think they should
The Holy Grail of Macro Economics: Lessons from Japan’s Great Recession, Richard Koo
In Germany, repairing the balance sheet started
only in the post-dot com crisis
The Holy Grail of Macro Economics: Lessons from Japan’s Great Recession, Richard Koo
Basel II was neither the cause nor the solution to the
current crisis although weaknesses were exposed
 Basel II implementation failures on parts of supervisors and banks, in
particular the gap between best practices and actual practices.
 ‘Dynamic Provisioning’ in form of counter cyclical buffers in.
 Formation of larger Asian supervisory colleges.
 Tightened regulations in the treatment of off-balance sheet items and fair
value accounting practices.
 Reversion of mark-to-market accounting - Is MTM an improvement in
the transparency of bank accounting?/ Does it reflect the intrinsic value
to a bank of a loan or securities.
Source: Asian Banker Research
Banks in Asia are still ambivalent on how much
provisioning they want on their books going forward
Gross NPLs by Country (2008)
14%
Emerging markets
12%
10%
8%
6%
4%
2%
0%
Source: Asian Banker Research
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15
The truly global banks have 20-30%
home base footprint
Contribution to total income by region
100%
Rest of World
90%
Contribution to total income by region
80%
All Asia
Rest of World
EMEA
70%
EMEA
60%
50%
EMEA
Rest of Asia
40%
Latin America
30%
20%
10%
Rest of Asia
Home
(North America)
Home (HK)
Home (HK)
HSBC
Standard Chartered
0%
Citicorp
Source: The Asian Banker Research
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Banks from large countries, like the US, are really more
local than global
100%
Rest of World
EMEA
90%
Rest of World
EMEA
Asia
80%
Asia
70%
60%
50%
40%
Home
Country
Home
Country
30%
20%
10%
0%
Bank of America
JPM
Source: Asian Banker Research
EMEA: Europe, Middle East, and Africa
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17
A strong deposit and capitalisation base is taking Chinese
banks international
1,400,000
1,200,000
US$ Million
1,000,000
800,000
600,000
400,000
200,000
ICBC
State Bank of India
MUFJ
Total Deposits (US$ Million)
HSBC
Bank of America
Citi
Market Capitalization (US$ Million)
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The large Asian banks are only just building their
international income base, although opportunities might
change this quickly
Unless they are consciously international, most Asian banks are domestic
100%
Contribution to total income by region
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
ICBC
ICICI
Home
DBS
International
Source: The Asian Banker Research
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19
There was a moment in history, when theoretically, a number of
Southeast Asian banks could have bought up a Citibank or an
RBS
Market capitalisation of selected banks in March 2009 (in million)
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Developing themes that could shape the safety of
the financial industry, globally
•
•
•
•
Price destruction on every product
Inflation-independent “asset appreciation”
Deleveraging
Government stimulus write-downs
Financial services may become safer if reduced to
regulated utilities
Copyright The Asian Banker 2009. All rights reserved
21
Subterfuge and more subterfuge
“I had 100-200 PhD’s at my disposal, and
even I did not know what was going on”
- Alan Greenspan, on CNBC in March 2009
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22