ASEAN banking integration and lessons from Europe

13 September 2015

(Extract from page 128 of BIS Quarterly Review, September 2015)

The ASEAN Banking Integration Framework

The ASEAN Banking Integration Framework (ABIF) aims to achieve a free flow of financial services within the ASEAN regional banking market by 2020. Under the ABIF, member countries have adopted the scheme of Qualified ASEAN Banks (QABs), in which a bank qualified in one jurisdiction will receive equal treatment in the others. To recognise the different levels of readiness among members, the ABIF process specifies two stages: a multilateral stage and a bilateral one. The multilateral stage will establish ASEAN-wide guidelines, while the bilateral stage will involve negotiations between countries on the admission of QABs. The framework will be implemented at two speeds: first among the five larger ASEAN economies, and later including the others.

The larger ASEAN economies are moving forward in negotiating bilateral agreements. On 31 December 2014, Bank Indonesia, the Financial Services Authority of Indonesia and the Central Bank of Malaysia signed a bilateral agreement that outlined the measures the two countries would implement under the ABIF, set out the definition of QABs and identified the market access and operational flexibilities that QABs would enjoy. As bilateral negotiations proceed among ASEAN governments, the negotiations have become catalysts for enhancing bank supervision and regulation in individual member jurisdictions in anticipation of an increasingly integrated banking system in the region.

Some lessons from banking integration in Europe

In many respects, the ASEAN members are following in Europe's footsteps. The member countries of the European Economic Area (EEA), consisting of the EU countries plus Iceland, Liechtenstein and Norway, agreed to mutual recognition of their supervisory frameworks in May 1992, and implemented in 1993 the "single passport" for banks, which ASEAN's QABs scheme resembles closely. The single passport fostered banking integration in Europe, although this proceeded only gradually.

One lesson from banking integration in the EEA is that the single passport should have been accompanied by effective area-wide banking supervision. Restoring confidence in the European banking system after the Great Financial Crisis of 2007−09 and the subsequent European sovereign debt crisis has required extraordinary efforts by the authorities. These have included the establishment of a single supervisory mechanism in the euro area, a comprehensive review of the quality of major banks' balance sheets, and macro stress tests to determine how much capital they would need to weather further adverse shocks. A related challenge currently being discussed is the setting of appropriate regulatory risk weights on credit to lower-rated EU sovereigns (Hannoun (2011)). Similar challenges are likely to arise as ASEAN financial authorities make progress in fully implementing QABs and seek to harmonise national regulations among the ASEAN members.

Another lesson is the importance of sound cross-border resolution frameworks. The resolution of troubled banks proved to be particularly difficult in the single banking market. For example, three Icelandic banks − Glitnir, Kaupthing Bank and Landsbanki − maintained large operations in the Netherlands and the United Kingdom under the EEA passport scheme. The collapse of these banks after 2008 sparked a cross-border dispute over who should pay for the bailout of their depositors. There was neither a region-wide resolution framework nor a bailout mechanism for dealing with failing cross-border banks. Progress has now been made with regard to resolving such issues in the future. A single rulebook for the resolution of banks and large investment firms in all EU member states came into force in January 2015. The new rules harmonised and improved the tools for dealing with failing banks across the European Union. At the same time, national resolution funds are being established. ASEAN members will be watching these steps closely as they work to develop their own resolution framework for regional banking integration.

ASEAN's 10 member countries can be divided into the larger "ASEAN-5" economies (Indonesia, Malaysia, the Philippines, Singapore and Thailand) and the smaller "BCLMV" economies (Brunei, Cambodia, Laos, Myanmar and Vietnam). For detailed accounts of the European lessons for ASEAN's banking integration, see Volz (2013) and Elliott (2014).