Post on 31-May-2020
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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
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Outline of Presentation
1. ASEAN Economic Community
2. ASEAN Financial Integration and Financial
Supervisory Systems
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1. ASEAN Economic Community
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
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1. ASEAN Economic Community
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)
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1. ASEAN Economic Community
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
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1. ASEAN Economic Community
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)
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1. ASEAN Economic Community
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.)
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1. ASEAN Economic Community
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
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1. ASEAN Economic Community
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
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1. ASEAN Economic Community
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
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1. ASEAN Economic Community
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
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1. ASEAN Economic Community
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
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1. ASEAN Economic Community
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
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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
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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)
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1. ASEAN Economic Community
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
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2. ASEAN Financial Integration and Financial
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
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2. ASEAN Financial Integration and Financial
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
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2. ASEAN Financial Integration and Financial
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%:
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2. ASEAN Financial Integration and Financial
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
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2. ASEAN Financial Integration and Financial
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
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2. ASEAN Financial Integration and Financial
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
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2. ASEAN Financial Integration and Financial
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
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2. ASEAN Financial Integration and Financial
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)
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2. ASEAN Financial Integration and Financial
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
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2. ASEAN Financial Integration and Financial
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
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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)
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2. ASEAN Financial Integration and Financial
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
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2. ASEAN Financial Integration and Financial
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
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2. ASEAN Financial Integration and Financial
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