Although the ASEAN Banking Integration Framework (ABIF) appears to hold great promise, the insistence on sticking to the so-called “ASEAN Way” threatens to undermine any possible success. This refusal of ASEAN member states to surrender any part of their sovereignty ultimately poses a major challenge to ABIF’s success.
Banking integration in the Association of South-East Asian Nations (ASEAN) is meant to create economies of scale, a wider consumer base for banks, cheaper financing thanks to lower interest rates, and easier technology transfers to boost regional growth and mitigate contagious risks such as seen during the Asian financial crisis of 1997. Local banks in ASEAN may have been grown and developed since the financial crisis, yet in terms of scale, asset, and presence, global banks have a stronger presence in the region. ABIF is meant to help ASEAN banks to match the economic power of the region.
Ratified in 2014, the ASEAN Banking Integration Framework (ABIF) will complement the ASEAN Single Market with a banking dimension, similar to how the Banking Union complements the European Single Market. Achieving this goal will require uniform regulation, cross-border resolution frameworks, a coherent infrastructure, similar banking capabilities across the whole region, and a uniform if not centralized supervisory mechanism in order to mitigate risks. Establishing these elements is a gradual process, but standardizing financial regulation requires a tradeoff between financial stability and the autonomy of a country’s monetary policy. In other words, this sort of banking union requires states to pool sovereignty to some degree.
Regulatory gaps persist
ABIF, however, sticks to the idea of the ASEAN way. It allows banks in the five “old” ASEAN countries to be classified as “Qualified ASEAN Banks” (QAB) when they meet certain criteria, which are then granted wider access to the other ASEAN markets. However, foreign banks will only receive the same treatment as domestic banks only when there is a bilateral agreement in place between home and host country. The idea is that by this system of gradual liberalization the intra-regional banking integration will be achieved by 2020.
One of the main challenges deals with the different banking regulations across the region. In the case of deposit insurance, some ASEAN member states have higher maximum payout. For example, Singapore’s deposit protection limit is capped at $36,000, while Indonesia’s Deposit Insurance Corporation guarantees up to $148,000.
In addition to regulatory inconsistencies, the lack of sufficient common financial safety mechanisms undermines the trust in the success of ABIF. The Chiang Mai Initiative Multilateralization – a regional currency swap facility among the ASEAN+3 countries – is a promising starting point. However, because it only has about $300 billion in reserves, it is far too shallow to instill trust among the ABIF-members. Furthermore, for banking integration to be successfully launched, each ASEAN country will first need to consolidate their banks in order to safeguard the region against the systemic risks.
Vested banking interests are also a stumbling block for the extension and deepening of ABIF. Interest rates vary widely across the association, with the open economies having the lowest ones and the more closed economies having much higher lending rates. The aim of ABIF to drive down interest rates in the region through increased competition in the banking industry might not be very well received in countries where national banks presently enjoy a monopoly on lending.
ASEAN prefers sovereignty over efficacy
Additionally, because the region lacks a regional financial supervisory authority during its integration of the banking market, the region might be exposed to spillover and contagion risks. As such, a single supervisory agency is needed in order to prevent such crisis and to make a fast response to manage those risks. Simply strengthening coordination among national supervisory authorities – the so-called ASEAN way – is not sufficient enough to counter the potential threat and risks to the region. Leaving the authority for financial supervision and crisis management on a national level while pursuing regional financial integration will only lead to financial instability. The region will need to find a solution to avoid a catch-22: not having a single supervisory authority undermines trust, and a lack of mutual trust foils efforts to integrate the banking system, reducing the need for a regional supervisor – and impeding banking integration.
While Thailand, Singapore and Malaysia – the likely winners of ABIF as their banks already have a pan-ASEAN presence – are pushing for swift implementation measures, Brunei, Cambodia, Laos, Myanmar and Vietnam (BCLMV) do not boast any banks that are capable of operating regionally. In addition, Singapore, Malaysia and Thailand are by far the largest intra-ASEAN portfolio investors, and so do have a strong need for a closer integration. Others, notably Indonesia and Myanmar, chose a protectionist approach to banking as a response to underdevelopment and relative lack of competitiveness.
Worrisome trends for the future
Hurdles to integration efforts are not only based on regulatory gaps and incoherence, but also based in intra-ASEAN rivalry and large development gaps of the banking systems. Expansion efforts of some banks to neighboring countries have often been met with opposition. But there is a much greater problem in the split between the old ASEAN members and the newer BCLMV-countries, exacerbated by fears that ABIF will place the BCLMV countries at a disadvantage: investments are unlikely to flow freely within the banking union, but will instead likely move to countries that have better political stability, lower levels of corruption and better regulations. Those conditions are hardly met in the BCLMV countries, even though they may need the flow of funds more. Thus, funds will likely move to the ASEAN Five: Indonesia, Malaysia, the Philippines, Singapore and Thailand. This will create a positive feedback effect, and will allow local banking infrastructure to develop faster in these countries.
This in turn may increase fears in the BCLMV countries that domestic banking markets might be dominated by foreign banks, especially from countries that are on the limit of their internal growth. If ASEAN inadequately tackles this challenge, an extension of ABIF to the “newer” ASEAN members will be faced with political opposition, creating a two-speed ASEAN for of banking and finance.