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.