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.