, Singapore

The real deal on AsiaPac banks and liquidity

By Moorad Choudhry

We speak of the “global” financial crash of 2008 but in many respects the crash was a trans-Atlantic one; certainly the bank crash was concentrated amongst US and European banks, although the economic impact was transmitted worldwide. If anything, Asian banks had already had their liquidity crisis, back in 1997, and learnt from it. The result was that the conservative liquidity and funding principles currently being laid down under Basel III were already enshrined in Asian banking culture by the time of the Lehman default.

This approach to liquidity risk management is exemplified by the fact that the majority of banks in the Asia-Pacific region do not view the Basel III liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) metrics with any great trepidation: the new requirements are already being met in many cases. One might say that the new-found Western emphasis on liquidity is a distraction from a topical issue of greater relevance to the Asia-Pac region, namely that of surplus liabilities and what to do with them.

The impact of central banks’ monetary policy easing has added to the surfeit of funds. Together with the existing liquidity management regime in Asia-Pac banks, it makes clear why the current issue is one of excess liabilities, not a shortage of them. The regional debate here is not of a risky over-reliance on short-term wholesale funds, but where to deploy funds for anything other than a minimum return at the central bank.

No easy solution presents itself. There is little point in securing a best-practice risk culture on the liability side of the balance sheet only to negate this by extending the risk-reward line on the asset side. The debate appears to be one of seeing at what point, beyond AAA sovereign bonds, one remains comfortable, starting with investment-grade corporate bonds and ending up with equities and commodity finance.

The latter is certainly viable, but may be too rich for some people’s blood, depending on the individual bank’s risk aversion. Where banks restrict themselves to investing in sovereign bonds to apply surplus funds, they may be tempted to hold long-dated assets; this creates greater market risk.

But in a global economic environment that remains in nervous mode, perhaps the solution is to stay risk averse, and restrict new business ideas needed to soak up surplus liabilities to only gold, inflation–linked sovereign debt and cash at (the central) bank? It’s not necessarily a bad idea.

The other approach of course is to review the bank’s business model itself. An excess of liabilities can end up being too much of a good thing. Is the solution instead to revamp the operating model so that these funds disappear? For example, by re-focusing deposit-raising strategy to concentrate in fewer sectors, or different sectors, such that the surplus slowly unwinds itself?

It is certainly an option, especially when one remembers that certain types of liabilities result, under Basel III, in a higher liquidity buffer requirement. Excess cash can be expensive. But that doesn’t necessarily mean that one throws caution to the wind and extends the risk-reward profile, especially when the economic environment remains uncertain. The answer may well lie, over time, in engineering the surplus away.
 

Follow the link for more news on

Join Asian Banking & Finance community
Since you're here...

...there are many ways you can work with us to advertise your company and connect to your customers. Our team can help you dight and create an advertising campaign, in print and digital, on this website and in print magazine.

We can also organize a real life or digital event for you and find thought leader speakers as well as industry leaders, who could be your potential partners, to join the event. We also run some awards programmes which give you an opportunity to be recognized for your achievements during the year and you can join this as a participant or a sponsor.

Let us help you drive your business forward with a good partnership!