Why Asian banks are stronger than US banks

Bangkok, Thailand

Asia’s markets are tumbling, but their banks aren’t.

A decade after their own debt crisis shook the world, Asian banks have so far averted the crippling run of failures afflicting the US and Europe. By staying away from risky US securities, prudent lenders in Asia may even stand to benefit from the current crisis, as stricken Western banks seek fresh capital.

Asia is feeling the credit squeeze. And fears of a global recession have pummeled equity markets here, too – Tokyo’s key index was down 4.25 percent Monday, pushing it to the lowest level in 4-1/2 years – but none of its financial institutions have collapsed.

A handful of banks in Hong Kong and India have had to reassure nervous savers not to pull their deposits. Regulators have also pumped extra money into credit markets, but there’s been no panicked rescues of stricken lenders, as in Western countries.

That’s because relatively few banks bought into the promises of US mortgage-backed assets. Those that did had only limited exposure before last year’s subprime blowout: Asia currently accounts for only $24 billion of $550 billion in global subprime-related loan write-offs, according to Bloomberg.

“We’re not really seeing a lot of pressure on Asian bank systems.... They just didn’t seem to build up their exposure [to US subprime loans] in a way that other banking systems did,” says James McCormack, head of Asia-Pacific sovereign ratings at Fitch Ratings in Hong Kong.

Many bankers in the region have painful memories of the 1997-98 crisis and prefer to lend cautiously, avoiding the kinds of high-risk, high-return bets that they can’t manage. Japan had its own experience of a real estate crash that kept economic growth on hold through much of the 1990s.

The US housing bubble came at a time when dynamic economies in Asia were offering ample lending opportunities, so there was less pressure to buy sophisticated US derivatives. A global economic slowdown is bound to crimp Asia’s export-led growth, but its bankers can breathe more easily knowing that they’re not saddled with toxic assets.

A culture of risk aversion underscores the differences between the US and Asian financial markets, says Cyn-Young Park, a senior economist at the Asian Development Bank in Manila. Regulators are more hawkish on monitoring banks, and companies are less likely to pile on debt so soon after the last crisis, which led to waves of bankruptcies.

But over the long term, such conservatism may be a handicap, she adds. “Asia wasn’t developed enough to digest all these [US] financial innovations into their system. In some senses, this isolation is a reflection of weakness,” she says.

Whatever the reason, cash-hoarding Asian banks – and governments – now appear to be in good stead as US banks try to dig out of a hole.

In a reversal of the 1997-98 crisis, Asian capital is beginning to flow West to buy marked-down assets in the financial sector. Japan’s Mitsubishi UFJ Financial recently paid $9 billion for a 21 percent stake in Morgan Stanley. Merrill Lynch and Citigroup have both raised capital this year from Singapore’s government, one of several in the region with ample foreign-currency reserves that are mostly held in US government debt.

Middle East oil producers also hold large reserves that could provide a lifeline for cash-strapped banks. Abu Dhabi’s sovereign fund last year spend $7.5 billion on a stake in Citigroup.

Fear of a nationalist backlash to their investments and the risk that asset values could decline further – as Merrill Lynch did after Singapore’s initial investment last year – may keep foreign governments on the sidelines. But the pressure on US banks to rebuild their capital base will continue, even if the Congressional bailout sucks out bad loans from the system.

That should be a magnet for sovereign wealth funds and healthy banks. “They’re the ones with the capital right now. You can assume that Western governments are happy to embrace their investments,” says David Cohen, director of Asian economic forecasting at Action Economics in Singapore.

Despite the relative strength of Asia’s banks, investors have been dumping stocks in the region. Leading the downward charge, Japanese stocks tumbled Monday, largely on fears that Asian exporters will be hit hard by an expected US recession.

Newspapers in Hong Kong quoted an executive of HSBC, a regional banking giant, warning that any slowdown in Asia would be “far more severe” than that of a decade ago and that recovery would be slower. Hong Kong’s Hang Seng index lost 5 percent, while markets in mainland China, South Korea, India, Singapore, Australia, and Thailand also slid.

Any global slowdown will eventually hurt banks in the region, says Emmanuel Daniel, founder and CEO of The Asian Banker, a publisher and research company in Singapore. Companies that rely heavily on demand from the US for their products and services are certain to feel the pinch, probably by early next year.

“There is concern that when that happens, the quality of borrowers within Asia will come into question and that in turn will affect the banking industry. This is the big one that Asian banks are bracing themselves for,” he says via e-mail.

Mr. McCormack says he’s monitoring banks that are vulnerable to tighter credit conditions, such as those in South Korea and Taiwan. “I think that the pressure we would see would be on banking systems that are dependent on capital markets for funding,” he says.