The case for ASEAN banking integration
It’s a Small World After All:
ith the start today of the 31st ASEAN Summit in Manila, it would be timely to share some thoughts on the importance of the ASEAN integration, particularly in the area of banking and finance.
Most of us, especially those who are into social networks such as Facebook, Instagram, and Twitter, are familiar with the concept of “six degrees of separation.” This network theory suggests that on average anyone can be connected to anyone else in just six steps.
More than just a popculture mantra, the idea that everything is connected has also increasingly become an economic and financial reality. With the advent of globalization and rapid technological innovation, financial markets all over the world are now more interconnected than ever. While this development certainly has its benefits, greater connectedness also has its potential risks.
For instance, greater connectedness has led to more occurrence of financial spillovers or contagion, where a problem in one country can quickly become a problem elsewhere. The preliminary results of the Financial Connectedness Index for the global equity markets currently being developed by the BSP would show that spillovers spike contemporaneously with economic and financial shocks
This development, among others, has contributed to a volatile, uncertain, complex, and ambiguous environment or what is known as a VUCA world. Under such environment, the Asian region becomes more susceptible to risks emanating from the pace of monetary policy normalization, notably by the Fed and the European Central Bank (ECB); geo-political risks, particularly on the Korean peninsula and in the Middle East; as well as the consequences of sustained low global inflation. One market of limitless possibilities Amid this VUCA world, it should make sense to enhance the scope for cooperation with our Asian neighbors and hold hands with “brothers” so to speak. But, what does ASEAN have as a region that is potent against VUCA? One might ask, why pursue integration during a period of heightened uncertainty where populism and prisoner’s dilemma type of outcomes are increasingly prevalent? We have seen the United Kingdom opt out of its membership with the European Union (EU), and more recently we are witnessing the unfolding of a similar crisis in Catalonia.
In my view, the pursuit of stronger regional integration presents a viable opportunity as a natural hedge against the protracted difficulties from the global economy.
By integrating 10 economies into a single bloc, ASEAN provides members greater market access to a market of approximately 640 million people. This is roughly equivalent to 9 percent of the world population. More importantly, the region offers a market that is considered the 3rd largest in Asia and the 5th largest in the world in terms of economic size, or gross domestic product (GDP). ASEAN is fuelled by a vision of a single market and production base that is highly competitive and integrated into the global economy. This is slowly happening with free movement of goods, services, investment, skilled labor, and freer flow of capital. Against other countries and economic blocks, ASEAN is stronger in the negotiating table as a block.
And what have we to show for this? Since the founding of the ASEAN in 1967, and with the implementation of the priority measures to establish an ASEAN Economic Community (AEC), the region has been transformed into an increasingly well-regulated, dynamic and creative platform for trade and commerce across what many regard as the world’s fastest-growing economic region
The necessary backbone Of course, achieving a fully integrated single ASEAN market requires financial integration that allows freer flow of financial services and capital. We should recognize that facilitating intra-ASEAN trade and investment will be implemented through increasing the role of ASEAN indigenous banks.
To do this, ASEAN central banks have crafted the ASEAN Banking Integration Framework (ABIF). With the framework in place, well-capitalized banks will start to become more visible across the ASEAN region. But ASEAN is also mindful of the diversity across ASEAN members in terms of economic conditions as well as legal and structural limitations. These realities make the task of integrating the banking sector more difficult and complex, and that is why the ABIF was created to operate under the principles of readiness, reciprocity, bilateral negotiations, capacity, building and financial stability. Reciprocity and bilateral negotiation in particular, should address the fear of some that big banks from the big ASEAN economies could impose undue dominance in the smaller jurisdictions. You do not ask for something which you are not ready to give. Thus, the Framework seeks to guide and facilitate the entry and operation of Qualified ASEAN banks (QABs) in ASEAN member countries to promote equal access and treatment among ASEAN banks.
QABs refer to high quality banks that are strong and well managed and meet specific qualifications including the prudential requirements of both home and host countries. Under ABIF, ASEAN members will aim at concluding reciprocal arrangements to create opportunities for establishing QABs in each jurisdiction and provide market access and operational flexibility. The extent of such concessions and flexibilities will depend on the bilateral negotiations of the concerned ASEAN members. While ABIF facilitates banking integration, it fully respects domestic prudential requirements. Imposition of a templated approach is a no-no in the ASEAN.
Where do we stand
To fully support the ABIF, the Philippines amended an existing law (Republic Act [RA] No. 7721) by enacting RA No. 10641 on July 15, 2014. This allowed foreign banks to operate in the Philippines through any one of the following modes of entry, subject to relevant licensing and other requirements prior to actual entry: 1) establishment of foreign bank branches with full banking authority; 2) acquisition of up to 100 percent of the voting stock of an existing domestic bank; or, 3) investing in up to 100 percent of the voting stock of a new locally incorporated banking subsidiary.
With this law, we are now at par with the rest of the ASEAN-5 in terms of legal frameworks for access in the banking system. Moreover, this