Wed, Oct 20, 1999 page17

• Asian banks need real reform: agency

  FINANCIAL SECTOR Thomson BankWatch, the world's biggest bank rating agency, says governments have been helping banks cover up bad loans and this will do nothing to help their performance in the longer term

  • AGENCIES
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  Asia needs new banks if it wants true financial sector reform as current restructuring efforts are only cosmetic, credit rating agency Thomson BankWatch said yesterday.

  "Efforts to date amount to little more than creative accounting techniques designed to mask insolvency," said Philippe Delhaise, president of Thomson BankWatch Asia, the world's largest bank rating agency.

  "Most banks in South Korea, Thailand, Indonesia and Malaysia are now at the mercy of their governments for their very survival," he said at the sidelines of the World Economic Forum's East Asia conference in Singapore.

  "Under government control, banks can more easily fake solvency. They conceal bad loans."

  Delhaise said Asian bank reform efforts to date have amounted to little more than creative accounting techniques, designed to mask insolvency.

  "The sad thing is that the bad guys, guys who have made all the mistakes, are still the ones who are involved in running banks," he said."What we need to do is create banks that can be regulated by ruthless regulators."

  Asian policymakers' focus on raising capital-asset ratios, making banks solvent through mergers and acquisitions or forming capital asset management companies were unsound, he said.

  What was needed was new banks that would take over the good assets of failed ones and start on a clean slate.

  Except for a small bank in Indonesia, Delhaise said he has not seen new major banks start up in Asia in six years.

  "You can run a bank on negative equity. Look at India, look at Pakistan, look at China," he said.

  "As long as the deposits are guaranteed and nobody is going to take its money away simply because the bank is bankrupt, solvency is not essential, liquidity is."

  The region's credit crunch problem was not solved by making banks solvent, he said.

  Delhaise also criticized merger efforts by some regional countries to save insolvent financial institutions.

  "Even in the best of times, merging two financial institutions is eating away so much time and energy.... This is nonsense," Delhaise said.

  "I don't see any benefits in the decisions taken in Malaysia. The only rationale I see, outside of camouflaging, is the flavor of the month."

  In July, Malaysia announced a plan to merge its 58 financial institutions into six or more core groups.

  Delhaise said the ignorance of the real banking problem would not deter Asia's economic recovery, but would slow it down, particularly in Thailand and South Korea.

  John Olds, chief executive of Southeast Asia's top bank, the Development Bank of Singapore, echoed such concerns, as he lamented the "disappointing" pace of change in bank restructuring efforts.

  "Basic tenets like creditors' rights and the enforcement of contractual obligations seem so antithetical to vested interests that even where statutes exist, delay and inaction are the rule rather than the exception," he said.

  Chartsiri Sophonpanich, president of Bangkok Bank, said restructuring efforts in Thailand were heading in the right direction, albeit not as speedily as some would like.

  Thai central bank governor Chatu Mongol Sonakul hoped Thai banks would be internationally competitive in two to three years.

  Thailand, along with South Korea and Indonesia, had followed mandates set by the IMF to sort out the mess its banking system got mired in as the crisis struck in mid-1997.

  The costs of cleaning up banking systems continue to mount as financial institutions drag their feet on reforms, the bankers warn.

  South Korea has spent 64 trillion won (US$53.15 billion) or 15 percent of its gross domestic product on restructuring, and estimates from credit rating agencies show Indonesia's bill may exceed US$100 billion on such efforts.

  "This extracts a tremendous toll on businesses large and small and is especially cruel to those below the poverty line, breeding waves of political discontent and sometimes political instability," said Olds.

  While policies and processes in bank restructuring could be guided by international precedents, it was up to Asian governments to provide the incentives to foster a sense of urgency, he said.

  Meanwhile, senior government officials and a banker from China attending the conference dismissed speculation that a yuan devaluation was on the cards as most Asian economies had ejected from crisis.

  "We have a good balance of payments in foreign exchange and our foreign exchange reserves since this year have been increasing," said Wang Chunzheng, executive vice-chairman of China's State Development Planning Commission.
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