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IMF
Regional Office for Asia and the Pacific (OAP) OAP Speeches and Transcripts  Financial Sector Reform in Asia Presentation by Kunio Saito Ladies and Gentlemen: Good afternoon. It is an honor and a pleasure... This afternoon, I would like to talk about financial sector reform in Asia. Despite this dry title, this topic is a human drama that has been taking place over the last few years in Korea, Indonesia, Thailand, as well as in Japan, Malaysia, the Philippines and other countries in the region. It involves many familiar names of specific corporations and individuals, as well as many business deals that involve complicated technical details. I will try not to go into these specifics and details, but rather focus on the broad picture and address a few general questions: How did reform begin? What is it about? And where is reform leading? I will also touch on three related topics: the Asian crisis, which explains how reform started; ongoing global efforts to strengthen the international financial architecture which provide support to and help shape Asia' s reform; and further globalization of Asian economies which will be an outcome of the reform. Asian Crisis So, let me start with the Asian crisis. I will be brief, since so much has been said and written about the crisis. I will make only three points, which I believe are relevant to subsequent reform efforts. First, as has been widely recognized, the Asian crisis was caused, at least in part, by financial sector weaknesses associated with a large amount of non-performing loans. These NPLs arose because of aggressive and at times, risky and imprudent lending, and from the lack of adequate prudential and supervisory arrangements to restrain such lending. Second, the crisis broke out when markets uncovered these weaknesses. It started with a few isolated incidents of bank failures, but due to the lack of accurate information, market participants were not able to differentiate between failed entities and the others in the system. Markets changed their perception of the system, and subsequently lost confidence in it. Large capital outflows followed, generating downward pressures on Asian currencies and equity prices. Although markets turned out to be right in changing their perception, their abrupt and disruptive moves triggered a full-blown crisis. Third, the Asian crisis was among other things a crisis of financial institutions. Many financial institutions faced insolvency and liquidity problems, as well as large losses. Some of them had to rely on extensive liquidity support from central banks to remain in business and avoid bank runs and failures. Market perception of their performance was negative. The prices of their shares were declining, as were their credit ratings. Thus, in late 1997, Asia's financial sectors faced an urgent task of stabilizing deteriorating conditions. They also faced the tasks of restructuring and rehabilitating themselves, as well as strengthening their institutional framework—prudential, supervisory, and transparency arrangements—to make them less vulnerable to future crises. Financial sector reform in Asia, broadly defined, has covered these three tasks—stabilization, rehabilitation, and strengthening of the sector. Stabilization Reform efforts began almost at the same time as the outbreak of the crisis in the second half of 1997. In the initial stage, the priority was to stabilize financial sector conditions, which, as I just mentioned were deteriorating rapidly. Towards that end, the authorities of crisis-affected countries acted in three ways. First, they closed insolvent and nonviable institutions. Some of you may recall the widely reported closures of 58 financing companies in Thailand, 16 private banks in Indonesia, and 14 merchant banks in Korea, all in the second half of 1997. This was necessary to stop further losses and associated increases in central bank liquidity support, both of which were becoming unsustainable. More importantly, I think, those closures were needed to send a message to markets that the authorities would act decisively in resolving the problems of weak institutions. Second, these bank closures were accompanied by a blanket government guarantee to protect both depositors and creditors. This was done in all crisis-affected countries, except Indonesia where it was introduced only after a partial-guarantee had failed to stabilize the situation. Third, authorities in these crisis-affected countries introduced comprehensive policy programs, including steps to resolve financial sector problems, and announced their firm commitment to implement them. How did these policy actions and announcements work? As we now know, it was difficult to convince markets and restore their confidence. Markets questioned, in some cases, the credibility of announced policies and the authorities' commitment to implement them. For these and other reasons it took some time before markets were stabilized and the crisis brought under control. But I think it is fair to say that by mid-1998 stabilization had been achieved and economic recovery had begun in most Asian countries. Rehabilitation At the same time as these stabilization efforts were made, the authorities of crisis-affected countries began work on rehabilitating financial sectors, focusing on weak institutions. This required extensive government interventions and injections of sizable public funds, as well as establishing, in many cases, restructuring and asset management agencies to handle these operations. Government interventions in weak institutions were extensive and complicated. But, at the risk of oversimplification, these interventions may be summarized in three steps. First, undercapitalized or insolvent institutions were identified on the basis of tightened loan classification and provisioning rules. They were then asked to submit a time-bound program to correct the problem of undercapitalization. Second, those institutions with nonviable programs were closed, nationalized, or put under government control. Third, those with viable programs were encouraged to lower NPLs and raise capital with the help of public funds. This encouragement was also given to relatively strong banks. After almost three years of bank restructuring and rehabilitation efforts, considerable progress has been made. Most of the intervened banks have followed the programs that had been earlier agreed upon. NPLs have been reduced, and new capital has been raised. Many institutions have moved ahead with their operational and management restructuring, including redeployment of workers and change of management. There have also been a number of strategic mergers and alliances, including with foreign partners. Nevertheless, much remains to be done. NPLs are still large and need to be lowered, especially by accelerating corporate debt restructuring—because the twin problems of NPLs and corporate debt overhang pose a major risk to ongoing economic recovery. Debt restructuring operations will require more capital and hence recapitalization still remains a challenge. Also management and operational restructuring has a long way to go. Other remaining reform agenda items include privatization of nationalized banks, and the disposal of NPLs taken over by asset management corporations. Given the sizable tasks that remain and the importance of restructuring in Asia's economic future, it is obvious that every effort must be made to sustain the momentum of reform. There is however, a sense of reform fatigue and complacency with what has been achieved. This must be resisted. As Mr. Stanley Fischer, the IMF's First Deputy Managing Director, has done frequently in the recent past, I would like to quote, in this context, the IMF's unofficial motto: "Resist complacency and continue with reform." Strengthening the Institutional Framework Let me now turn to the third area of reform, which is to establish a strong financial system and make it less vulnerable to future crises. This requires efforts to improve institutional frameworks—prudential, supervisory, and transparency arrangements—at both national and international levels. On a national level, efforts are being made to establish a system, which will enable supervisory authorities to identify financial problems and weak institutions early on; and will let them intervene in weak institutions for early correction of these problems; and which will be operated in a transparent manner. In other words, actions to identify and resolve weak financial institutions must be made operational on a continuing basis. At the international level, various international codes, standards, and best practices are being developed to help national efforts. The Basle Committee's capital adequacy and bank supervision codes and the IMF's transparency codes on monetary and financial sector policies are well known, but there are many more. Also, the IMF together with the World Bank and other international organizations, has been asked to help monitor the implementation by national authorities of these and related codes and standards. Furthermore, an experimental project to assess financial sector stability of individual countries has recently been launched. These are part of ongoing efforts to strengthen the international financial architecture, which have been widely reported. A major challenge for Asian countries is to put this system firmly in place. All the required elements are there—supervisory and other institutions have been set up. However, these institutions are still weak and there is no culture to support this new system. So, continuing efforts are again needed in this respect. When this system is firmly put in place, it will help lower the risk of another financial crisis and help sustain growth without disruption. Such a system also means that financial institutions in Asia will be operating on the same supervisory and transparency rules as those elsewhere in the world. Asia will be more closely integrated into the global system—which is in fact the ultimate goal of ongoing reform efforts. Globalization In fact, Asia's financial sector reform is only a part of its broader effort to adapt itself to an increasingly globalized economic system. As I have indicated repeatedly, the goal of reform is to make Asia's financial and corporate sectors competitive in the global system. It is one of the many policies to promote globalization. Having said this, I should recognize that globalization these days is a controversial subject and I feel I should make a few points before concluding. First, globalization can be painful to some sectors, but overall, it helps economies to develop and grow faster. Globalization involves restructuring of weak and uncompetitive enterprises, which often results in business failures and unemployment. This is certainly a serious problem and that is part of the reason why many people have been demonstrating against policies to promote globalization. Nevertheless, with appropriate social safety nets to address these problems, globalization must be promoted. After all, globalization has been, and will be, one of the key forces underlying Asia's rapid economic growth. Second, globalization has been accompanied by the introduction of an increasingly large number of international codes, standards, and best practices. While they may not fully reflect "Asian ways," it is in Asia's interest to implement them expeditiously. Also as international standards and best practices keep evolving, it is important for Asian countries to be actively involved in discussions to ensure new and revised codes and standards reflect their views. This of course applies not only to Asia but also to the rest of the world. Conclusion My third and last point is my conclusion and it is that globalization is here to stay. Asia is better off living with it as the region has done always in the past, taking advantage of the merits globalization offers and working with others in the international community in dealing with its shortcomings. In this way, Asia will remain a key member of a globalized world, and as such, will be able to prosper in it. To me, this is the promise of Asia, and I believe it can be delivered. Thank you. |
