IMF flags growing risk of cross-border banking flows in Asia

Tokyo

WITH financial markets in general continuing to suffer turbulence, a senior International Monetary Fund (IMF) official on Monday warned of the need for improved supervision of growing cross-border flows of bank finance in Asia.

In particular, IMF deputy managing director Mitsuhiro Furusawa drew attention to the "internationalisation of Chinese banks" and the issues that this raises for cross-border capital flows.

Meanwhile, the Bank of Japan has expressed concern at the surge in foreign-currency lending by Japanese banks, including regional banks, and the risk of a future funding squeeze this poses for banks.

Mr Furusawa told a banking conference in Tokyo that a challenge for official regulators lay in devising an effective framework for consolidated supervision.

"Our assessments of financial systems suggest that most countries have problems identifying and dealing with risks posed by the financial institutions and activities that span sectors and cross borders," he said.

The IMF's half-yearly Global Financial Stability Report, an analysis of Asian banks' geographical allocation of assets, showed that the share of regional assets rose from about 10 per cent to close to 20 per cent of total assets after 2008, Mr Furusawa said.

This partly reflects the internationalisation of Chinese banks, he added.

"Cross-border bank flows to Asian economies (excluding Japan and Australia) increased by about 80 per cent between 2007 and the first quarter of 2015.

"While cross-border banking brings diversification, risk-sharing, and investment benefits to home and host countries, stronger regional linkages also bring the potential of greater vulnerability to cross-border shocks.

"This is particularly important within corporate groups as affiliates in different jurisdictions increase the risk of contagion.

"The failure of a group or its affiliates can threaten financial stability in multiple jurisdictions. We saw this during the global crisis, when shocks moved rapidly from the US housing market to global markets."

Mr Furusawa, noting the challenges involving bank supervision and regulation and crisis resolution, said:

"Financial reforms that help strengthen the soundness of parent banks can help limit the transmission of negative shocks by foreign affiliates.

"A pragmatic approach involves information sharing, harmonised institutional and regulatory frameworks to ensure consistent implementation of regulatory standards and compatible arrangements for cross-border resolution.

"These shared objectives, combined with stronger cooperation and coordination among regulators and supervisors, can ensure the benefits of globalised banking while limiting the risks to financial stability."

Mr Furusawa said that, as Asian financial systems continue growing in size and complexity, the role of regulators and regulatory cooperation becomes ever more important.