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Asian banks ability to finance projects questioned

Bank of Thailand Governor Prasarn Trairatvorakul yesterday expressed concern over whether Asian banks have the capacity to finance major infrastructure projects, now that European and US banks have downsized their presence in the region because of ongoing crises at home.

Speaking at the Sasin Bangkok Forum on the topic of "Financial Crises and the Future of Global and Asian Banking", Prasarn said the future of the banking industry at both the global level and in Asia was being shaped by three major forces: the fragile global economy, global financial regulatory reforms, and the rise of Asia, which faces it own developmental challenges.

These forces are interrelated and complex, and no one can claim to understand the final outcome fully, he said. "So is this the new paradigm of the 'known-unknown'? That is, we know what the major drivers of change are, but we cannot forecast the outcome?" he said.

The key strategic challenge, therefore, is how to deal with the known-unknown, the central bank chief said.

"In Asia, we have seen banks from the Asia-Pacific region, notably Japanese, Chinese and Australian, move into the space from which European and US banks have retreated. Asean banks are also shifting strategy to play a greater role in supporting their conglomerates in the region's expansion," he said.

While Asian banks can do very well in providing simple financial services such as loans to importers and exporters, they do not have the sophisticated services that their European and US counterparts possess, he warned.

"For instance, if the Laotian government wants to raise funds for building power-plant projects, which need long-term finance, Asian banks may not be able to provide such funding. But European banks are good at funding long-term projects, as Western investment banks are used to providing a complete financial package comprising loans, bonds and equity," he said.

Prasarn said he was unsure what lay ahead. While the region has so far remained relatively resilient to the first-round impact of European bank deleveraging, there is significant concern about a second-round impact from a slowdown in global trade and economy, which would negatively affect growth.

His comments come at a time that Thailand and other Asean countries - notably Indonesia, Vietnam, Myanmar, Laos and Cambodia - require a great deal of funding for infrastructure projects.

Banking reform under Basel III, which is still being debated, and other measures aimed at increasing bank capital and liquidity, could have a negative effect on emerging financial markets, since they could lead to a rise in banking cost as well as a reduction of bank credits and financial-market liquidity, he said.

Eric Rosengren, president and chief executive of the Federal Reserve Bank of Boston, told the forum that no region would be insulated from the impact of the European crisis and the weak US economy.

While banks in Europe and North America are closely interconnected, those in the West do not have the same magnitude of interconnection with their counterparts in Asia, he said, adding that such interconnection would rise over time.

Reflecting on the causes of the European Union sovereign-debt and US sub-prime crises, Rosengren said people had made the wrong call in assuming that euro-zone sovereign debt would not be defaulted, while the assumption that US real-estate prices would not go down had also turned out to be incorrect.

Takatoshi Ito, professor of economics at the University of Tokyo, said the 1997 Asian financial crisis and the more recent financial crises in Europe and the US shared many of the same elements, namely crony capitalism, moral hazard, conflicts of interest and a contagion effect.


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