Asia has to sort out troubled banks: Expert

Asia has to sort out troubled banks: Expert

HONG KONG (Dow Jones): Asia cannot thrive again unless its governments make the hard decisions necessary to restructure their problem-ridden financial sectors, the president of London- based think tank Independent Strategy said Tuesday.

In a commentary published in local English-language newspaper The South China Morning Post, David Roche said "fixing Asia means fixing the banks, or to be more accurate, financial systems."

"It makes intuitive sense that Asia cannot become a thriving modern economy again without a functioning financial system," said Roche, president of Independent Strategy, an independent financial consulting group, and a former managing director and global strategist at Morgan Stanley.

Roche said Asian governments must do two things. First, they must buy banks' bad debts, forcing banks to write down the value of the bad debts to a realistic valuation of the collateral. At the same time, they should wipe the write-off from the value of shareholders' capital.

"The government then buys the bad debts for about the market value of their collateral. If the operation is done correctly and without political favoritism, the ultimate cost to the taxpayer can be low or zero," Roche said.

Second, governments must recapitalize banks by replacing the written-down share capital of the banks to provide a cushion of security for depositors and other creditors. In the process, old shareholders will normally lose control, and the banks will effectively be nationalized, he said.

"The government should then auction off the banks in a process open to all bidders, with no restrictions on foreigners. It makes no difference if Thailand's biggest bank is Bangkok Bank or Citibank," Roche said.

Roche said total bank credit in Thailand, South Korea, Indonesia and Malaysia is more than US$800 billion, or about 130 percent of their total gross domestic product.

Of this, about 40 percent to 50 percent represents non- performing loans and only 30 percent to 40 percent of these may be recoverable by asset sales, he said.

If 45 percent of these banks' loans are non-performing, of which 35 percent is recoverable, the net loss is just under 30 percent of total lending, or US$238 billion, or 38 percent of GDP, Roche said.

And if banks' own capital and reserves are set against loan losses, the remaining outstanding losses would total about US$180 billion, or 29 percent of GDP.

Asian governments would pay for writing this off and for recapitalizing banks to international standards -- about US$36 billion -- for a total bill of US$216 billion, or 34 percent of the combined GDP of the four countries.

While the four countries can recapitalize banks with long-term loans, at current domestic interest rates the cost would be prohibitive.

"There is a better way forward, in my judgment," Roche said, advocating that western financial assistance should target financial restructuring, on condition that "proper bankruptcy laws" are implemented, that U.S. or British bank inspectors audit the banking sector, that existing shareholders take the hit of loan write-offs and that the sale of nationalized banks be open to all comers.