Big banks win out as forex market shrinks
Big banks win out as forex market shrinks
SINGAPORE (Dow Jones): A year after the flotation of the baht
signaled the start of Asia's descent into economic crisis,
volatility in Southeast Asia's foreign exchange markets has
soared but trading volumes have shrunk dramatically.
Far from despairing at the loss of their livelihood, however,
foreign exchange managers at the larger international banks in
the region are confident.
As Southeast Asian currencies went into a tail-spin and the
credit quality of regional banks crumbled, Southeast Asian
companies have abandoned longstanding client relationships with
domestic banks, turning instead for their foreign exchange
services to a handful of international banks with established
regional networks.
With their solid balance sheets and risk management expertise,
the big international banks are more attractive counterparties
for corporations increasingly sensitive to credit risk. And that
perceived solidity is likely to continue to boost their business
at the expense of smaller domestic banks, which are left facing
higher risks and a dwindling customer base.
The biggest international banks have also won out over their
smaller international competitors.
By concentrating on the basics of foreign exchange the larger
banks believe their businesses can survive, and even prosper, in
the midst of Asia's economic turmoil.
"The continuing crisis is helping us," says Lam Kun Kin, the
head of regional currencies and derivatives at Citibank in
Singapore.
Although Lam hesitates to quantify the increase in customer
business that Citibank has seen since the beginning of the
crisis, he does note that the bank has recruited three new spot
foreign exchange dealers to trade regional currencies.
Meanwhile, volatility in the rupiah and ringgit rose more than
elevenfold over the period surveyed by the BIS, while baht
volatility jumped eightfold.
This rapid rise in volatility has also helped concentrate
business in the hands of the larger banks, with smaller
institutions becoming less and less willing to provide liquidity
by making markets in regional currencies. With greater volatility
they found themselves forced to reduce the amount of capital they
allocated to trading regional currencies in order to keep their
risk of loss down to acceptable levels.
For the smaller players, trading regional currencies has
quickly become too expensive, and they have either scaled down
their commitment to the market or withdrawn altogether, further
concentrating business in the hands of the largest players.