Banks and financial intermediation in emerging Asia: reforms and new risks

The conventional view is that microeconomic reforms after the 1997-98 Asian financial crisis have greatly strengthened banking systems in Asia. Banks have become better capitalised, external exposures have been reduced and credit risk has been managed more effectively. But this conventional view does not take enough account of the macroeconomic background. A sharp rise in domestic savings, combined with the recent large-scale sterilised intervention and easy monetary policy, has led to very easy financing conditions for banks. Bank credit expanded. Banks have accumulated a large stock of government bonds. How these conditions will change and how this will affect banks in Asia is uncertain. Supervisory authorities therefore need to be sure that the present very liquid position of most banking systems in Asia does not allow significant (but so far only latent) increases in market and credit risk to go undetected.