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Banking & Finance

Time for ‘Asia-first’ thinking as the US and Europe question financial regulations

Andrew Sheng says that Asian economies should take a hint from ‘America first’, plus European doubts over Basel III, and tailor financial regulations to meet regional realities rather than believing that ‘West is best’

PUBLISHED : Friday, 24 November, 2017, 12:32pm
UPDATED : Friday, 24 November, 2017, 7:12pm

Hong Kong this week celebrated the breaking of the 30,000 level on the Hang Seng Index for the first time in a decade. It may well top the peak of 31,958 on October 30, 2007, before the global financial crisis.

Earlier last month, the US Treasury published the third of its reports on the US financial system, with the aim of unwinding many of the tough financial reforms enacted in the post-crisis decade on banking, capital markets, asset management and insurance.

After a decade of slow growth following the tough medicine of the Dodd-Frank Act and Basel III reforms, the US and Europeans are beginning to roll back some complex, burdensome regulations. As part of the election promises by the Trump administration, the US Treasury earlier this year issued some core principles on how it proposes to make financial regulation efficient, effective and appropriately tailored.

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Across the Atlantic, it is not without irony that Andreas Dombret, a board member of the Deutsche Bundesbank, recently observed: “Basel III reforms … have made the rules even more detailed and complicated. The Basel rules are made for large internationally active banks – they were not designed with small banks in mind.”

Crudely speaking, have we asked Asian banks, mostly locally oriented, to take complex cancer medicine for global banks, when the on-the-ground problems are more like basic malaria?

Attending the Asian Global Dialogue, at the Asia Global Institute, University of Hong Kong this week, the mood was one of concern that mindsets and institutions are running one or two cycles behind the markets. This is particularly true for Asian intellectuals and policymakers who have followed the creed that “West is best”.

The problem with the Asians-as-followers syndrome has become more acute in the area of fintech. As Asian regulators diligently followed the implementation of Basel III rules, which are great in principle on more capital but deeply complex and comprehensible only to highly paid lawyers and compliance specialists, Asian financial market lunches are being eaten on the rise of fintech platforms that move rapidly into the field of payments, logistics, distribution and even asset management. Bitcoin even threatens to disrupt sovereign central bank money.

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Those who ask incumbent financial institutions to play in regulatory sandboxes need to ask whether Asians are still kindergarten kids or adults facing the real world. They miss the fundamental point that current regulatory mindsets are still in functional or product silos, whereas technology platforms are already cutting across regulatory boundaries, which push the real business either off the balance sheet or offshore. Financial regulators did not ask the fundamental question whether regulating only part of business makes sense, when they are holding only the financial leg of business, whereas tech platforms are engaging seamlessly in multisector business, from manufacturing, production, distribution and payments to value management.

“America first” means Americans choose policies that best fit US conditions and needs. Asian followers who think “West is best” should at least agree that global rules should be applied to best fit Asian conditions. No one disputes the need to apply broad principles of prudent banking and sound corporate governance, but if finance does not serve the real economy, finance will suffer.

The fundamental mistake of the post-crisis reforms adopted by both the US and the Europeans (diligently followed in Asia) is to think that their debt overhang can be solved by more debt. The US Treasury report on the capital market showed that both the number of listed companies and the number and size of IPOs (initial public offerings of listed securities) have declined. There are only 50,000 listed companies in the world, whereas there are millions of small and medium-sized enterprises still struggling to access capital.

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Indeed, as economist William Lazonick has shown, the amount of net equity capital raised by US companies in public markets in the past decade has been less than the amount paid out by these companies in terms of dividends and share buy-backs. These giant companies have cut back on long-term investments and kept larger amounts of cash in offshore tax havens, while borrowing domestically for tax purposes. They have cut back on wages and the labour force, creating the whirlwind of populist anger from job insecurity.

If Americans are questioning whether this is best for American behaviour, Asians need to ask more fundamental questions about whether that model of the real economy and financial structure best fits their own domestic conditions. It’s time to grow up and think for ourselves.

Andrew Sheng writes on global issues from an Asian perspective and refuses to think in sandboxes