East Asian governments take action in time of financial crisis

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In my last post, I discussed how emerging Asia is getting hit by the financial storm and the early signs of stress in the financial systems across the region. The intensity of this storm appears to be getting worse, but governments across East Asia are taking a wide range of measures to bolster their financial systems.

After the jump, I discuss the actions taken by governments so far include and what needs to happen next.

  • Monetary Policy: Most central banks have cut policy interest rates to help boost credit markets. The most recent examples this month include the Bank of Thailand cutting its key policy rate, the one-day repo rate by 100 basis points (bps), the People’s Bank of China cutting its one-year lending rate by 108 bps, and the State Bank of Vietnam cutting its base rate by 100 bps. 
  • Liquidity Support: Most central banks made liquidity injections into the markets, largely to support inter-bank lending. Some central banks provided guarantees on bank debts. For instance the Bank of Korea provided a $100 billion guarantee for banks’ new foreign debt. A number of central banks also established currency swap arrangements to ensure that sufficient foreign currency could be accessed. Japan, Korea, and Singapore made such arrangements with the US Federal Reserve.  
  • Deposit Guarantees: Almost every country increased deposit insurance coverage or provided blanket guarantees of deposits to maintain public confidence in the banking systems. The major exception in the region is China, where the Government now plans to establish a deposit insurance scheme by 2009. However, blanket guarantees in the long run can distort incentives and raise concerns about fiscal sustainability. 
  • Capitalization of Banks: Some central banks in the region have prepared facilities to inject capital into banks directly. Hong Kong and Japan expanded capacities to inject capital into banks if necessary. Korea announced a plan to inject capital into three state-owned banks to support lending for small and medium-sized enterprises. Elsewhere, this action has not been viewed as necessary as the banks have not yet generated losses of a size to warrant such actions. Yet concerns persist that banks will not have access to the capital needed to absorb losses and to continue the loan growth that will be needed to underpin historical growth rates. 
  • Banking Standards: A number of governments have attempted to boost credit markets by temporarily altering some key requirements for banks. Many central banks and/or supervisory authorities reduced the reserve ratios, relaxed rules on collateral in various ways (often broadening the definition of what is accepted in money market operations or for reserves), and practiced regulatory forbearance in some areas, such as the restrictions on the rolling over of certain types of loans. In addition, some authorities have stopped the push towards international capital adequacy rules (i.e., Basel II) for the next year or more.
  • Banking Supervision: A number of special market surveillance activities have been initiated to assess the systemic vulnerabilities in the banking system to various risks. The emphasis thus far has been on the largest banks and their exposures to the sectors most seriously impacted by the crisis, such as exporters and manufacturing. Some examples include the Chinese banking authorities, which engaged in special surveys and analysis of loan concentrations and monitoring of particular sector exposures, such as to real estate, in late October. The Korean Financial Services Commission conducted special analysis of the foreign currency liquidity of the banking system, as well as the overall financial soundness of the banks in October. Also, the financial regulators in Indonesia recently took actions on accounting treatment of certain types of assets.
  • Capital Market Stabilization: Some Asian securities regulators, wary of higher volatility and of steeper declines in share prices, have narrowed the trading bands in their markets (Taiwan and Vietnam) or banned or otherwise curbed short sales (Australia, Indonesia, Korea, Taiwan, and Vietnam). As I discussed on this blog in November, China, Malaysia, and Taiwan have also gone to the extent of conducting stabilization fund operations. It should be noted that these actions still have not had a lasting, positive impact on stock prices.

All of these steps are encouraging, as is the pace at which decision-making is taking place within the region. However, it is clear that more needs to be done in the immediate future to avoid more serious financial system stress.

A first step could be to conduct more widespread and systematic surveillance of financial conditions and long term viability of systemically important banks. This could be shared more widely so there is a common understanding of the risks and cross-border exposures. The supervisory authorities could also develop plans for crisis management, procedures, public relations, and liquidity support mechanisms for banks in the event of problems. Governments can also review and strengthen the legislative frameworks, processes, and institutional capacities for problem bank and asset resolution. Other creative steps can be taken, such as providing different forms of loan guarantee to targeted industries (as is being done in a few countries in the region already, such as Hong Kong). Finally, there is an urgent need to improve the coordination and communication processes among all financial regulators, as was discussed in more depth in an October blog post.

Beyond these more immediate responses, policy makers should not lose sight of the longer-term implications of the current crisis and on the unfinished financial sector reform agenda across the region. It may be too early to understand the full implications of the current financial storm that is now hitting Asia, but policy makers in the region are already beginning to take the opportunity to try to learn new lessons from the crisis. So, let’s see what comes out of this week’s discussions of regional policy makers at the Financial Stability Forum meeting in Hong Kong.

Editor’s note: This is the second of two posts looking at East Asia’s position in the ongoing financial crisis. Click here to read part one.


James Seward

Senior Financial Officer

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