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AseanAffairs Magazine September - October 2011





This year has seen increasing climate change disasters throughout the world.

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Rajiv Biswas


Asian economies are not only strengthening their global clout but Asian financial institutions are also expanding beyond their traditional bases.

Since the end of World War II, cross-border international finance has been dominated by the banks, insurance companies and asset management firms of North America and Europe. This has created considerable vulnerabilities for the world economy, as the 2008-09 financial crisis showed, due to the drying up of international money and credit markets. The large European and US banks at the heart of international financing had difficulties accessing credit after the Lehman Brothers collapse in September 2008. This caused liquidity problems that forced sudden and rapid deleveraging of bank balance sheets. This in turn resulted in a massive contraction in international financial flows to developing countries and played a significant role in the world trade slump that occurred at that time.

With the European sovereign debt crisis continuing to escalate during 2011, the European banks face a protracted period of deleveraging as they try to repair risk-weighted capital ratios. In the US, the massive task of government deficit reduction will be a drag on US economic growth for some time. Meanwhile, Asia-Pacific and other developing countries’ economies continue to grow more rapidly than those in the OECD region. The uneven structure of international finance has created significant vulnerabilities for financing economic development in emerging markets.


During the first 50 years after World War II, the US and Europe were the world’s largest economic regions. The dominance of US and European banks in international finance reflected the economic weight of their economies in the global economy and their relatively strong economic growth.

However, these trends have shifted dramatically during the last decade. The growing economy of China, followed by other large emerging economies such as India and Brazil, has resulted in a rapid rebalancing of the global economy as the total size of gross domestic product (GDP) in developing countries is rapidly approaching the GDP of developed countries.

The rapid growth of the Asia-Pacific region has made it the largest and fastest growing global market for financial services. China and India are driving that demand. However, Asia-Pacific banks, despite their large and fast-growing domestic balance sheets, have not yet become significant players in the big league of global finance. While Japanese banks did make significant inroads in international finance during the 1980s, the bursting of the Japanese economic bubble forced a major contraction in international operations of Japanese banks, as they underwent a decade of restructuring and consolidation to address their own banking crisis.

The asymmetry in international finance is still clearly reflected in investment banking in Asia, with US and European banks continuing to dominate the Asian investment banking business in key areas of international finance, including mergers and acquisitions, international IPOs, international bond placements and syndicated lending. While several Japanese banks are also large players, seven of the nine leading investment banks by revenue in 2011 year-to-date are from the US and Europe.



US$million, year to date, August 2011
Source: Wall Street Journal, 12 August 2011, Dealogic



 While international banks from the US and Europe may like to be perceived as globalized in nature, the reality is very different. US and European banks that are major players in international finance remain heavily driven by the economic and regulatory environment in their home markets, with the composition of their boards and top management strongly reflecting this.
The reliance of developing countries on international financing from European and US banks increases their vulnerability to the systemic problems of Europe and US economies. This has been clearly demonstrated by Europe’s present economic crisis. 

For emerging markets, this dependency on international financing from western banks has resulted in a roller coaster ride of lending flows by international commercial banks. Periods of rapid expansion in credit are followed by sharp contraction in international lending that restricts lending for trade and investment in emerging economies. Such capital flow volatility creates significant risks for developing countries in their own economic development, as extreme volatility can significantly disrupt trade and investment.

The developing countries’ share of GDP in the global economy now compares with the developed countries’ share. It is forecast to surpass developed countries within the next decade but the role of developing country financial institutions in international finance remains small. A reshaping of the structure of global finance is needed to reduce the vulnerability of developing countries to the economies and financial systems of the US and Europe. This will require a significant expansion by financial institutions in Asia and other emerging market regions................


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