BANKING ON PROSPERITY

Banking on prosperity

December 23 2007

Anniversary

TIME passes swiftly. It is now 10 years from the Asian banking crisis of 1997 and much has changed. Readers may remember that the collapse of the Thai bhat lost billions of dollars and put Asian economies into a state of turmoil. Much has changed for the better and far from losing a decade of development much of Asia has made great progress. As that progress continues, a damaged global financial sector needs to assess current and future risk and take action. Meanwhile the Asian financial sector must understand that the progress that they have made is progress only. The job is far from finished.

In a recent report McKinsey has analysed whether enough has changed in Asian banking to avoid another catastrophe. North American, European and some Asian banks are suffering from a crisis that they created. The danger is that the global economy may suffer with them. The answer to McKinsey's challenge appears to be "No". Let us take a look, however, at the facts before reaching any harsh conclusions.

Transformation

THERE can be little doubt that 10 years after the massive problems the Asian banking system is now far better placed to withstand shocks. The Japanese economy has risen from the ashes, India and China have developed into global economic giants. Investment capital is abundant and the need for it is obvious and growing. It would seem that all is well now and for the future, but perhaps we should never take things for granted and risks — even those that have apparently been resolved — should constantly be considered afresh as the global economy develops. When creativity and innovation are encouraged latent risks will emerge. Not only Asian, but global banks must be ready to deal with them.

Shocks will occur

THE rate of change carries with it the seeds of future concern. Imbalances are all but inevitable when growth is rapid. Does the present state of the financial sector in Asia give us cause for celebration or concern? Or is it, as experience suggests, a complex mixture of new strengths and old weaknesses? Ten years is a very short time for shock-proof risk management across a continent that is experiencing massive change.

Asia may well continue its momentum and soon stand equal to the USA and Europe as a global leader in financial services, but there will be problems to be faced and history to be studied en route. The West, with centuries of experience can hardly claim that they always get it right.

Growth

FOR a decade growth of many parts of the Asian economy has been the main economic and business "talking point" in the West. With expanding prosperity the financial sector has grown, is growing and will grow further. By 2015 it will account for nearly 30 per cent of the world increase in international financial services.

Today four Asian centres are included in the top 10 financial cities of the world. Hong Kong, Singapore, Sydney and Tokyo are now major international centres that rival those of the West.

London and New York continue their long-term domination, but Asian achievement has been remarkable. The danger will be that, flushed with success, policy makers in Asia will discontinue the view that reform is "work in progress" and fall into the trap of believing that the whole task is accomplished.

The "to do" list

EFFECTIVE risk management needs to be come a key part of the culture of financial institutions to an ever greater degree. We have recently experienced what happens when global bankers move away from their traditional habit of conservatism. The global economy is only beginning to pay for short-term greed. Nobody appears to know how great the final cost will be. The danger still exists that a problem will develop into a full scale crisis in spite of the intervention by national banks.

Hopefully the Asian financial sector and that of the rest of the world will embed the lessons. Risk management must permeate every organisation. They and we must not point the finger and assume that there is nothing needing to be done on "our" part. The West should step back a little towards tradition while the East enhances a "new" culture.

Contingency planning must be careful and continuous. Threats abound. Some are foreseeable and therefore avoidable. Appropriate avoidance actions should be built into strategies, but some shocks will emerge. We are now suffering from what happens when contingency planning is slack and greed is rampant.

Corporate governance should be the focus of mind and behaviour for every board. Again this goes beyond the development of systems. Recent happenings in the UK involving the loss of data suggest that systems are meaningless unless the right "state of mind" is developed.

Talent, in this sector as elsewhere is scarce and needs to be acquired and developed. Talent offers creativity, but for the global economy's sake, innovation needs to be tempered by effective risk assessment and planning. Talented people should see a little further than most of us and should be encouraged and enabled to do so. Talented people with a deep understanding of the global situation will see further yet.

Ben Bernanke has recently begun the process of opening up, in the face of entrenched defensiveness, conduits of information that will enable closer relationships between the financial sector, regulators, central banks and policy makers so that all can be pulling in the same direction with clear and shared goals constantly in sight. For the USA this is virgin territory. For London it is an old story. We can all learn together as both West and East explore that territory with a new intensity.

The take away

AS the result of a decade of thought and hard work the finance industry in Asia has developed in a way that mirrors the continent's economic and trading success. The achievements have been great, but the job is far from finished. As Asia continues to tackle that job the West needs to ensure that we do not limit ourselves to advice on how to remove the "mote" from Asia's eye.

We have our own beam to "pluck out" and only by working together will the global economy prosper in a climate of reduced risk. Goldman Sachs record profits, announced this week, show what effective contingency planning can do. Without effective planning, governance and action the next crisis is never far away.

Tom Lambert is an international businessman and distinguished academic and author. He will be contributing a weekly column from Europe to the Khaleej Times.

Source: http://www.khaleejtimes.com/ColumnistHomeNew.asp?section=proftomlambert&col=yes