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Copyright The Asian Banker 2009. All rights reserved 1
The Asian Banker
Discussion Point
“Avoiding the Icelandic crisis – the Asian response”
Emmanuel DanielPresident & CEOThe Asian Banker
Copyright The Asian Banker 2009. All rights reserved 2
I hope to discuss…
• The Icelandic crisis
• The evolution of the financial services industry
• The changing nature of the largest and strongest financial institutions
Iceland: Timetable for disaster
1997
Total equity of banking
system only 23b isk (7.3% of GDP) and
assets97% of GDP
Kaputhing
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
Glacier bonds
Private sector debt:equity ratio
150-200%
20032002
Privatisation of banking system
FSA not happy with
privatisation of Landsbanki – to
be owned by leveraged
company with govt providing 70% financing
2006
“This is not a bank, but a
hedge fund” – on Kaupthing
Bank
The rise of trading in CDS
Opportunity to short Icelandic
banks
Drobny attack on isk
Massive capital
intensive power
projects
2004
Rise of domestic consumer lending – domestic
asset inflation, rise
in cost of funds and
attraction for foreign carry
trade
2007
Massive capital
intensive power
projects
Iceland melting
SK in fre fall / CDS
spreads 100 bp
2008 – 90% of equity market
wiped out
“How can a highly leveraged country be AAA
rated?”Source: Why Iceland, Asgeir Jonsson
Copyright The Asian Banker 2009. All rights reserved 4
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 5
September 15 17 18 21 22 25 26
October 1 to 9 10 11---Now
•Lehman Brother filed for bankruptcy;
•Merrill Lynch was sold to BoA
•AIG and HBOS have been bailed out;
•Morgan Stanley share price fell 30%
•Russian, Indian markets experienced wild
fluctuation;•US, UK and other nations
banned short selling
•FSA rescued Bradford& Bingley after the company’s market value shrunk 90%
•Morgan Stanley and Goldman Sachs converted to traditional bank holding
companies
•Ireland became the first nation in Euro zone to enter
recession
•Washington Mutual was sold to JP Morgan Chase
for US$1.9billion;•Many major banks in US
and Europe saw their shares plumped
•US Treasury US$700 billion rescue plan ;
•UK Treasury £ 500 billion bail-out package ;
•The nationalization of three largest Icelandic banks;
•Simultaneous interest rate cut by six central banks
•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
•Systematic bail-outs world wide;
•Markets rallied after the release of joint-
efforts rescue package worth
US$2,546bn from EU nations.
There were in fact, three crises that happened simultaneously
Source: Asian Banker Research
Markets Crisis
Banking Crisis
Economic Crisis
What was the Icelandic crisis – the lack of coordination between government, prudential and systemic regulators
The Banking Regulator
The Icelandic FSA
The Government
The Central Bank
The Banking Sector
The Corporate Sector
Source: Asian Banker Research
Copyright The Asian Banker 2009. All rights reserved 7
The relationship between the government, prudential and systemic regulators is so different in each country
The current prognosis is that the banking systems in Asia are generally of sustainable size, although…
Banking Assets as a Proportion of GDP
Source: Asian Banker Research
Copyright The Asian Banker 2009. All rights reserved 9
Banking assets as a % of GDP tell a different story in each Asian country
Source: Asian Banker Research
Some observers think that emerging Asia is particular vulnerable to credit risk dangers more than systemic risks
Danger of domestic credit risk
Banking System Imbalances
Domestic Leverage
For
eign
Fin
anci
ng
Source: TAC Consulting
Copyright The Asian Banker 2009. All rights reserved 11 Source: Asian Banker Research
Current size
Potential size
Size and sophistication of the consumer credit market is growing dramatically across the Asia Pacific region
Thailand
Current market size: $25bn
Potential market: $180bn
Malaysia
Current market size: $100bn
Potential market: $130bn
Hong Kong
Current market size: $115bn
Potential market: $170bn
South Korea
Current market size: $600bn
Potential market: $790bn
India
Current market size: $130bn
Potential market: $800bn
Singapore
Current market size: $105bn
Potential market: $120bn
Indonesia
Current market size: $32bn
Potential market: $300bn
Philippines
Current market size: $11bn
Potential market: $100bn
Vietnam
Current market size: $5bn
Potential market: $40bn
Taiwan
Current market size: $220bn
Potential market: $310bn
Japan
Current market size: $1800bn
Potential market: $2000bn
China
Current market size: $475bn
Potential market: $2350bn
Australia
Current market size: $560bn
Potential market: $650bn
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
Copyright The Asian Banker 2009. All rights reserved 15
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)
Emerging markets
Copyright The Asian Banker 2009. All rights reserved 16
The truly global banks have 20-30% home base footprint
Source: The Asian Banker Research
Copyright The Asian Banker 2009. All rights reserved 17
Banks from large countries, like the US, are really more local than global
Source: Asian Banker Research
EMEA: Europe, Middle East, and Africa
Copyright The Asian Banker 2009. All rights reserved 18
A strong deposit and capitalisation base is taking Chinese banks international
Copyright The Asian Banker 2009. All rights reserved 19
The large Asian banks are only just building their international income base, although opportunities might change this quickly
Source: The Asian Banker Research
Copyright The Asian Banker 2009. All rights reserved 20
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)
Copyright The Asian Banker 2009. All rights reserved 21
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