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Malaysia, India avert crisis due to less exposure to international banking system: IMF

NEW DELHI, Sept 26 (Bernama) -- Low degree of exposure to international banking system has helped economies such as Australia, Canada, India and Malaysia to avoid the worst effects of the global financial crisis.

"India and Malaysia appear insulated from foreign banks by almost all indicators when compared with all peer groups except developing Asia and the economies (besides India) that make up the BRIC Group (Brazil, Russia and China)," said the International Monetary Fund (IMF).

It said both India and Malaysia have low foreign bank presence and banks there have a very low level of foreign assets in their balance sheet.

"Malaysia had relatively low reliance on foreign liabilities compared with other peers whereas in 2007 India was close to the BRIC average," it said in its Global Financial Stability report, in which it explored the banking system "openness" and regulatory frameworks of four jurisdictions generally regarded a less globally integrated, all of which fared relatively well in the financial crisis.

India and Malaysia also explicitly restrict entry by foreign banks, which are common among emerging economies in the region, although both economies have relaxed the policy somewhat.

In Malaysia, branches of foreign banks are prohibited, and approvals for establishing banking subsidiaries are rare—no new entry had been approved until very recently.

However, a number of foreign banks that had entered before the respective policies were established have significant operations in Malaysia, resulting in a relatively high foreign bank share.

The number of branches a subsidiary can set up had also been restricted. The maximum foreign ownership stake in a domestic bank is 30 per cent, it said. In India, foreign bank entry has been through branches, and the number of approvals including expansion of branch networks is strictly controlled.

Foreign banks that already have operations in India are not permitted to own more than five per cent of shares in domestic banks. Other foreign banks must seek approval to own more than 10 per cent of shares in an Indian bank.

Similarly, the regulatory policies in Australia and Canada share some features that might have resulted in less globally integrated banking systems.

One important policy they have in common is the de facto prohibition of mergers among major domestic banks.

While its primary objective is to retain competition, the prohibition has prevented an increase in the size of these banks and the creation of national "champions" that could compete with major global financial institutions.

This may have been a factor limiting their banks' international activities.

"The two economies also impose restrictions on shareholder ownership, which limits acquisition of domestic banks by either other domestic banks or foreign ones, although establishment of subsidiaries and branches of foreign banks are not restricted, except on prudential grounds," said IMF.

Statistics however suggest that prudential regulatory requirements placed on entry of foreign banks may be less important for financial stability than the funding structure of domestic banks.

Analysis shows that banking systems less reliant on foreign funding economies whose bank assets were relatively less funded with international liabilities in 2007 had higher credit growth in the five years since the crisis.

The international body said all four economies reviewed here follow the pattern of other peer groups on average, especially Australia and Malaysia.

Other evidence suggests that having a strong domestic deposit base is important for supporting local lending by foreign banks.

Hence, the positive experience of these four economies could be attributed not only to their regulatory approaches but all the funding structure of the banks, it added.

 

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