The upcoming economic integration of the Association of Southeast Asian Nations (Asean) in 2015 promises growth opportunities for banks, but closer links may also pose risks related to crossborder transactions and capital flows, and could hasten any contagion, the Bangko Sentral ng Pilipinas (BSP) warned local banks.
BSP Deputy Governor Diwa Guinigundo said on Wednesday integration can provide banks the opportunity to capture larger markets, lower banking costs, increase efficiency and mobility of services.
Guinigundo, however, also pointed out that the task of integration is difficult and complex as economic conditions, as well as legal and structural limitations, vary across member states.
To avoid the risk of domination of the regional industry by any single group, “preexisting market conditions should be taken into consideration – for example, allowing member states with less developed banking institutions to liberalize market access of foreign banks to their domestic market at a slower pace,” the BSP official told a forum sponsored by the Asian Development Bank and Asian Institute of Management.
The recognition of the benefits, risks, and the diversity of Asean is a key element in forming the appropriate parameters in implementing banking integration in Asean, he added.
In the case of the Philippines, Guinigundo said that out of 676 domestic banks, only five universal banks have international presence.
“Additionally, Philippine banks are still relatively small compared with the top players in Asean. For example, the assets of DBS Singapore are bigger than the entire Philippine banking system and almost four times the combined assets of the top three banks in the Philippines,” he said at the forum.
In terms of capitalization, the largest Malaysian and Singaporean banks are as big as the entire Philippine banking system, he said.
Asean has achieved significant progress in establishing a guiding framework for the integration of the region’s banking sector to promote deeper regional financial integration through the Qualified Asean Banks (QABs) program, said Guinigundo.
According to the Asean Banking Integration Framework, a domestic bank, once qualified as a QAB, can operate within Asean countries but must comply with prudential and governance standards of those countries.
The official further said that the overseas expansion of Asean commercial banks into other countries in the region is very limited, noting that no Asean commercial bank has either a branch or a subsidiary in all Asean countries.
Guinigundo said that the challenge is to build a framework that takes into consideration domestic conditions and encourages efforts toward reducing existing restrictions.
“In this context, Asean member states continue their work in drafting the guidelines for the Asean Banking Integration Framework, with focus on strengthening the following principles and elements: readiness, reciprocity, bilateral negotiations, capacity-building and financial stability infrastructure,” he added.