With 8.1% YoY continual asset growth in Q2 2012, are Asian banks in danger of becoming “too big to fail”?
Despite Asian banks' aggressive expansion in regions of high growth, conflicts of interest between commercial and investment banking arms could spell disaster in the long run. August 03, 2012 | Doron FooOn-going global instability has uncovered a myriad of issues plaguing the Western banking sector’s financial supermarket model. These include conflicts of interest between different business lines, moral hazards and increasing profitability targets from shareholders. This culture strongly encouraged extensive risk taking and fraud to maximize shareholder value. Examples range from Societe Generale’s rouge trader Jerome Kerviel in 2008 ($7.4 bn), Goldman Sach’s alleged accounting manipulation in 2010, JPMorgan’s huge trading losses from its CIO office in 2012 (up to $7.5 bn) and perhaps the most significant scandal – Barclay’s and other banks’ manipulation of the London Interbank Offered Rate (LIBOR). These events have significantly undermined investors’ confidence in the financial sector. JPMorgan’s huge proprietary trading losses exemplify the conflicts of interest that can happen to a bank despite being hailed as having one of the best risk management system and risk managers in the world. As Western banks concentrate efforts back home, Asian banks are still expanding assets strongly at approximately 8.1% YoY in Q2 2012. In turn, the proportion of Asian banks recognized as Systemically Important Financial Institutions (SIFIs) is also expected to grow from the current 4 out of 29 banks (Japan’s Mitsubishi UFJ, Mizuho Financial Group, Sumitomo Mitsui Financial Group and Bank of China). This has warranted concerns on whether Asian banks will one day become overly large and interconnected. In this scenario, their failure will be disastrous to the regional economy and therefore prompted up by tax payers. It is highly unlikely that Asian banks will follow the footsteps of Western peers in falling into the “too big to fail” dilemma as they are generally possess a stronger balance sheet due to risk aversion and operate on a specialised model focusing on commercial banking. Figure 1. Tier 1 Capital Adequacy of Banks i...
Categories: Capital & Strategic Issues,Databook,Risk and Regulation, Capital & Strategic Issues,Databook,Risk and Regulation, Keywords:Glass–Steagall Act, JPMorgan, Barclays, LIBOR, Proprietary Trading, Dodd-Frank, Volcker Rule, Consumer Protection Act, CIMB, Tier-1 CAR, Loan To Deposit Ratio, PIIGS, Canada, US, EU, Jimmy Koh
Glass–Steagall Act, JPMorgan, Barclays, LIBOR, Proprietary Trading, Dodd-Frank, Volcker Rule, Consumer Protection Act, CIMB, Tier-1 CAR, Loan to Deposit Ratio, PIIGS, Canada, US, EU, Jimmy Koh
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