IMF sees larger foreign bank role in Asia

IMF sees larger foreign bank role in Asia

SEOUL (Reuters): Foreign banks will likely have a larger presence in Asia's highly-protected financial sector under recent reforms agreed with the International Monetary Fund, IMF Asia- Pacific director Hubert Neiss said yesterday.

"That could well be, and in principle, this is very desirable," Neiss told Reuters in an interview.

"The banking system now needs additional capital and additional managerial expertise and both can be obtained through greater openness to foreign participation," he said.

The IMF has spearheaded bail-outs totaling some US$116 billion for Indonesia, Thailand and South Korea. Reforming their financial systems was a key element in the rescue packages.

In all three countries, impediments to foreign ownership in the financial sector have been removed, although a number of restrictions remain.

Asian nations have in the past been reluctant to open up their financial sectors, fearing their underdeveloped systems could not stand up to foreign competition.

"It is a legitimate worry about the process," Neiss said.

"The process has to be very carefully handled. Local banks have to be strengthened by this process. But if you shut out competition, then local banks will not restructure. They will deteriorate and sooner or later you have another crisis.

"But the way to introduce proper competition, yes, that has to be carefully handled," Neiss said.

Weak banking systems were at the heart of the "Asian contagion" that started with the bursting of a real estate bubble in Thailand a year ago and swept across Southeast Asia into the Northeast.

Reforming them is key to solving the crisis, Neiss said. "These are reforms that by their very nature take time. You cannot reform a banking system overnight, or in weeks or in months. This will take a couple of years.

"But what is more important is to make a strong and credible beginning and that is being made," he said.

The reforms are focused first on recapitalizing banks. They are also aimed at streamlining operations so banks can meet international standards for capital adequacy, debt provisioning and defining bad debts and assets. Finally, they seek to set up more efficient bank supervision systems, Neiss said.

One of the lessons being drawn from the Asian crisis was that the banking system had not grown in tandem with economies which had been fueled by massive amounts of foreign capital.

Banks were financing themselves through short-term foreign borrowing and making medium- to long-term loans to sometimes questionable projects, Neiss said.

"So the banks ended up with non-performing loans and as their repayment flows came into difficulties the banks themselves had difficulties to repay their own foreign loans and that led to a loss of confidence not only in foreign markets but in domestic markets.

The rapidity with which capital flew out of the region "was shocking", Neiss said, describing it as a "new aspect of this crisis".

"Therefore it was so important to restore and maintain confidence," he said.

"The outbreak of the crisis was made very rapid by the immense amount of foreign capital that is now very mobile and very volatile.

"Therefore, all programs in all countries are centered on strengthening the domestic economy through long-term structural reform in the financial sector," Neiss said.