How Asia's banks rode out the credit crisis

In the wake of the subprime fallout, with some European and North American peers declaring billions of dollars' worth of subprime-related writedowns, the Asia's banks have remained resilient.

For Zeti Akhtar Aziz, a key reason for this is the raft of regulatory reform introduced in the wake of the Asian financial crisis.

"The banking institutions in our region have been strengthened since the crisis ten years ago," says Zeti. "They're better capitalised, they have better risk management systems, they have better standards of governance. We have also strengthened our supervisory oversight. So this has placed them in a very much stronger position to deal with increased volatility."

"There has been a lot of cooperation and collaboration between the central banks in the region that has moved to a much higher level in recent years," the governor says.

Malaysian reform

Since 1997, Bank Negara Malaysia has introduced several measures aimed at improving financial stability.

A central credit reference information system now provides information to the country's banks on exposures for individuals, businesses and conglomerates. The central bank has also set up an agency called Credit Guarantee Corporation for Small Businesses, which allows banks to make better assessments about these companies' exposures. "The banks are very aware of the exposure of the people they lend to so they are in a better position to assess the creditworthiness of the borrowers," Zeti says. "The system is very effective in improving the risk management of the banking sector. We now see non-performing loans declining to below 3%."

"Our supervisory oversight is very forward-looking as well," Zeti adds. "We stress test the banks under more extreme and demanding circumstances and they have shown an ability to be very resilient."

A new deposit insurance system was set up three years ago. At the outset, banks had to pay a flat premium rate but at the beginning of this year the central bank introduced differentiated rates so that banks with less risk pay a lower premium. "It's highly differentiated so there's a significant incentive for the banks to take less risk," Zeti says. All but 5% of the country's depositors are insured under the scheme.

Banks must also provide a letter of undertaking to address the risks associated with entering new business areas.

Other factors

Another factor in the Asian banking sector's avoidance of the credit crunch has been its very limited exposure to subprime related products. "Asian banks have probably less infrastructure to deal with subprime-related products, including the systems and expertise needed for these types of instruments," Zeti says.

The development of domestic financial markets, particularly the bond market, has also played its part: "The banking sector has more significant exposure to domestic and regional markets," Zeti says. "There has been ample liquidity in our financial system. The tight liquidity has been in the dollar markets, our regional markets are flush with liquidity."