Information about Asia and the Pacific Asia y el Pacífico

Chapter 2. A Bird’s-Eye View of Finance in Asia

Ratna Sahay, Cheng Lim, Chikahisa Sumi, James Walsh, and Jerald Schiff
Published Date:
August 2015
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Information about Asia and the Pacific Asia y el Pacífico
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Heedon Kang, Phakawa Jeasakul and Cheng Hoon Lim 

Main Points of this Chapter

  • Despite their diversity, Asia’s financial sectors share some similarities. These include the dominant role played by banks, the rising importance of capital markets, and the significant degree of influence exerted by governments.
  • Banking sectors tend to be well capitalized and largely reliant on deposit funding. However, access to funding by small and medium-sized enterprises lags behind such access in other regions.
  • Despite recent rapid growth, equity and bond markets remain underdeveloped and illiquid in part due to a paucity of real money and long-term institutional investors.
  • Asia’s financial sectors remain less complex than those of Europe and North America, but the growth of shadow banking and structured financial products is beginning to change this relative complexity. Cross-border interconnectedness is also increasing.
  • The region’s evolving needs will continue to spur development of the financial sector. Policymakers must carefully manage risks while continuing to further develop capital markets. This is necessary to overcome inefficiencies and mobilize savings to support vibrant economic growth.


Asia is home to a diverse set of financial systems that vary in depth and sophistication. The region includes a number of emerging market and low-income economies in which banks play a dominant role. However, in these economies, banks’ functions remain basic; capital markets and financial services, such as asset management and insurance, stay largely embryonic; and sizable financial intermediation occurs through informal channels. With financial sector development still at the fledgling stage, growth opportunities are abundant as these economies expand.

Asia is home to a number of advanced economies in which banking sectors are large and sophisticated, and capital markets are deep and well developed. In some of these economies, banks face declining profit margins because domestic opportunities for growth have become more limited. However, they are poised to gain a growing share of the regional market following the significant pullback by European banks in the wake of the global financial crisis.

Asia also is home to thriving international financial hubs, such as Hong Kong SAR and Singapore, which are highly interconnected within the region and with other global financial centers.

This chapter aims to provide answers to the following questions:

  • What is the role of finance in Asia? Who are the key players and what are their main functions? Is shadow banking important?
  • How does private credit intermediation take place in Asia? How does financial inclusiveness compare to inclusiveness in other regions?
  • What role do Asian governments play in the financial sector? Is the extent of government involvement in the financial sector greater than it is elsewhere?
  • How does financial sector complexity and interconnectedness in Asian economies compare with that in other parts of the world?
  • How does the structure of Asia’s financial system affect financial stability in the region?

The Role of Finance, Key Players, and Main Functions

Asia as a whole has a large financial sector.1 At the end of 2012 the estimated sum of aggregate assets of financial institutions and outstanding values of bond and stock markets in Asia amounted to 580 percent of the region’s GDP. This compares with an estimated sum of about 700 percent of GDP in the euro area and in the United States. Across Asia, financial sectors vary considerably in size, ranging from 340 percent of GDP in emerging Asia to 880 percent of GDP in advanced Asia. Financial sectors in emerging Asia are considerably larger than those in its peers outside Asia (Figure 2.1).

Figure 2.1Selected Economies and Regions: Size of Financial Sectors

(Percent of GDP, end-2012)

Sources: Bank for International Settlements, Debt Securities Statistics; Bankscope; Bloomberg, L.P.; country authorities’ reports; Financial Stability Board, Global Shadow Banking Monitoring Report 2013; IMF, World Economic Outlook database; and IMF staff estimates.

1 Brazil, Mexico, Russia, South Africa, Turkey.

Bond and equity markets provide alternative channels of funding and investment for public and private sectors. At end-2012, outstanding debt securities were 110 percent of GDP; about 65 percent of these were issued by governments. Japanese government bonds form the largest segment of Asian bond markets, accounting for almost half of outstanding debt securities. Stock markets are also large, with market capitalization amounting to 75 percent of the region’s GDP, but they vary significantly in their relative importance across Asia. Hong Kong SAR and Singapore dominate the scene as regional financial centers (Figure 2.2).2

Figure 2.2Structure of Asia’s Financial Sector

(Percent of GDP, end-2012)

Sources: Bankscope; Bank for International Settlements, Debt Securities Statistics; Bloomberg, L.P.; country authorities’ reports; IMF, World Economic Outlook database; and IMF staff estimates.

Financial Institutions

Banks and nonbank depository institutions are the dominant financial institutions in Asia. Their assets amounted to 270 percent of GDP at end-2012, or 69 percent of the aggregate assets of financial institutions. Assets of banks accounted for 56 percent of the aggregate assets of financial institutions, while assets of nonbank depository institutions accounted for 13 percent. Mostly small in size, nonbank depository institutions are active in Japan and Korea, where credit cooperatives play an important role in providing access to finance for households and small businesses that are deemed less creditworthy. However, some nonbank depository institutions are exceptionally large, such as Japan’s fully government-owned Post Bank, which is the largest financial institution in the world. Together, banks and nonbank depository institutions play a vital role in credit intermediation in Asia, with the following noteworthy aspects:

  • Varied regulatory frameworks within the region result in different banking structures. In Japan, Korea, and Malaysia, banks are part of conglomerates owned by holding companies that are also active in insurance or investment banking. Australia, Hong Kong SAR, and Singapore subscribe to a universal banking model that provides both commercial and investment banking services. In Indonesia and Thailand most banks are stand-alone commercial institutions that conduct insurance or investment banking businesses through subsidiaries.
  • Asia has six global systemically important banks (G-SIBs). There are three in Japan: Mitsubishi UFJ Financial Group, Mizuho Financial Group, and Sumitomo Mitsui Financial Group; and three in China: Agricultural Bank of China, Bank of China, and Industrial and Commercial Bank of China. In other countries, highly profitable local opportunities have encouraged banks to retain a domestic focus. However, as European banks have retrenched in the wake of the global financial crisis, Australian and Japanese banks have gained overseas market share, expanding their international business by some 40 percent from the first quarter of 2007 to the third quarter of 2013. Japanese G-SIBs are among the top 10 global lenders in loan syndication and trade financing.
  • Government ownership of banks is fairly common in Asia. Governments control about 23 percent of the aggregate assets of financial institutions, with 16 percent in commercial banks and 7 percent in policy banks.3 Government ownership is markedly higher in emerging Asia, especially China, India, Indonesia, and Malaysia, but policy banks also have an important presence in Korea, the Philippines, and Thailand.
  • By contrast, foreign ownership of locally incorporated banks is relatively limited, accounting for 3 percent of aggregate assets of financial institutions. The exceptions are Hong Kong SAR and New Zealand, where banking systems are dominated by U.K. and Australian banks, respectively. Many foreign banks operate as branches in Asia (Fiechter and others 2011). However, where their operations are large, foreign banks tend to establish subsidiaries, which are subject to the same regulatory and supervisory treatment as domestic banks. In a number of Asian countries, local authorities require foreign bank branches to hold capital as a ring-fencing measure. Among foreign banks, Citigroup, HSBC, and Standard Chartered have strong footprints in Asia.

The second-largest group of financial institutions includes pension funds and insurance companies. This group holds combined assets of 70 percent of the region’s GDP, or 18 percent of the aggregate assets of financial institutions. Pension funds and insurance companies in Asia often exhibit significant home bias, with many investing more than 80 percent of their assets in domestic markets. This home bias is not evident in Hong Kong SAR and Singapore (Chan and Hull 2013). Important characteristics of pension funds and insurance companies are the following:

  • Pension funds and insurance companies are more prominent in advanced Asia, where their assets accounted for 11 percent and 12 percent, respectively, of the aggregate assets of financial institutions at end-2012. In emerging Asia they accounted for 2 percent and 6 percent, respectively.
  • The paucity of “real-money investors,” such as pension funds and insurance companies, appears to be linked to the underdevelopment of capital markets in a number of Asian economies. There is a high correlation between the size of the institutional investor base and the size of capital markets. This underscores the importance of developing a critical mass of long-term institutional investors to support financial deepening, including improved market efficiency and liquidity (Figure 2.3).

Figure 2.3Asia: Institutional Investors and Capital Markets

(Percent of GDP)

Sources: Bank for International Settlements, Debt Securities Statistics; Bloomberg, L.P.; country authorities’ reports; IMF, World Economic Outlook database; and IMF staff estimates.

Note: AUS = Australia; CHN = China; IDN = Indonesia; IND = India; JPN = Japan; KOR = Korea; MYS = Malaysia; NZL = New Zealand; PHL = the Philippines; SGP = Singapore; THA = Thailand.

1 Size of capital markets is based on the sum of stock market capitalization and oustanding debt securities.

2 Size of institutional investor base is based on assets of investment funds, pension funds, and insurance companies.

The third group comprises other nonbank financial institutions with assets amounting to 50 percent of GDP at end-2012, or 13 percent of the aggregate assets of financial institutions. These institutions are lightly or not regulated by authorities and are regarded as “shadow banks” according to the definition of the Financial Stability Board (FSB).4 This group includes finance companies that mainly provide consumer finance, broker-dealers that act primarily as market makers facilitating transactions, and asset management companies that offer money market mutual funds and other collective investment vehicles. Both advanced and emerging Asia still have smaller shadow banking sectors (85 percent and 25 percent of GDP, respectively) than do their respective counterparts in other regions. For example, both the euro area and the United States have shadow banking sectors of more than 150 percent of GDP, and both Brazil and South Africa have sectors of more than 50 percent of GDP (Figure 2.4). In emerging Asia, finance companies play a major role, accounting for more than 50 percent of the shadow banking system in India, Indonesia, and the Philippines. By contrast, shadow banks in advanced Asia mainly include asset management companies and broker-dealers that provide sophisticated investment and structured products. Two countries—China and Japan—accounted for more than two-thirds of the aggregate assets of Asia’s shadow banking sector at end-2012, but they have experienced different trends since the global financial crisis, described below:

Figure 2.4Selected Economies: Assets of Other Nonbank Financial Institutions

(Percent of GDP, end-2012)

Sources: Financial Stability Board, Global Shadow Banking Monitoring Report 2013; country authorities’ reports; and IMF staff estimates.

  • Japan’s shadow banking sector has shrunk, mirroring the experiences of other advanced economies. After reaching a peak of about 75 percent of GDP in 2007, the shadow banking sector dropped to 65 percent in 2012. Tighter lending conditions—driven by adoption of the 2006 Money Lending Business Act—contributed to this trend. The act imposed loan-to-income limits on loans from finance companies (also known as “money lenders”). Finance companies’ assets declined from 22 percent to 15 percent of GDP during 2006-12 (Konno, Teramoto, and Mera 2012).
  • In China, however, shadow banking activities have continued to grow in size and complexity. Nonbank financial intermediation amounted to 34 percent of China’s GDP in 2013—growing strongly since 2010 (FSB 2014). Much of the nonbank credit provision in China, excluding bond financing, consists of commercial banks doing bank-like business away from their own balance sheets (IMF 2014). Two key factors have been driving this trend: a search for yield by retail investors who try to circumvent regulatory caps on bank deposit rates, and the desire of commercial banks to move certain types of loans off their books to avoid regulatory restrictions on lending activities. These restrictions include reserve requirements and caps on loan-to-deposit ratios.

Capital Markets

Asia’s capital markets serve as a significant source of long-term financing for investment. In the past decade, Asia’s bond and stock markets have grown more rapidly than those of their global peers, roughly doubling in size (Figure 2.5). This is particularly true in emerging Asia, where market capitalization has risen eightfold. Foreign exchange markets have become vibrant (Box 2.1), while stock and bond markets have become an important funding source for both private and public sectors. In Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, and Thailand outstanding values of bond and stock markets have already surpassed banking sector assets.

Figure 2.5Asia: Capital Markets during 2004–12

(Percent of 2012 GDP)

Sources: Bank for International Settlements, Debt Securities Statistics; Bloomberg, L.P.; IMF, World Economic Outlook database; and IMF staff calculations.

Japan still has the region’s largest bond market, and is home to the world’s second-largest bond market. At end-2012, Japan accounted for 63 percent of total outstanding debt securities issued in Asia, compared with almost 85 percent a decade ago. The significant decline in Japan’s relative prominence in the Asian bond market is largely due to the rapid growth of the Chinese bond market. Nonetheless, the Japanese government bond market is the largest market segment in Asia, accounting for 46 percent of outstanding debt securities and 76 percent of trading volume. Across Asia, about 60 percent of debt securities are issued by governments, another 30 percent by financial institutions, and the rest by nonfinancial corporations.

Concerted efforts to develop local bond markets in the aftermath of the Asian financial crisis have also borne fruit.5 Asia’s domestic issuances of bonds relative to international issuances are now larger than that in other parts of the world. Only 6 percent of Asia’s debt securities are issued internationally, compared with 24 percent in non-Asian advanced economies and 14 percent in non-Asian emerging market economies.6 This focus on local bond markets helps reduce excessive reliance on short-term funding provided by banks and mitigate currency and maturity mismatches. This, in turn, has increased the resilience of Asian economies over the past decade.

However, bond markets still have room to develop in many Asian economies, in which outstanding amounts of debt securities tend to be small relative to income levels (Figure 2.6). A primary reason is Asia’s relatively low level of public indebtedness. With the exception of Japan, where government debt is high, most Asian countries have low public debt. Moreover, some governments, such as those in China and India, still rely significantly on nonmarket forms of funding, such as loans. The issuance of debt securities accounts for only about 40 percent of total government debt in China and India compared with a global average of 85 percent.

Figure 2.6Selected Economies: Capital Markets and Economic Development

(Percent of GDP, end-2012)

Sources: Bank for International Settlements, Debt Securities Statistics; Bloomberg, L.P.; IMF World Economic Outlook database; and IMF staff calculations.

Note: AUS = Australia; CHN = China; HKG = Hong Kong SAR; IDN = Indonesia; IND = India; JPN = Japan; KOR = Korea; MYS = Malaysia; NZL = New Zealand; PHL = the Philippines; SIN = Singapore; THA = Thailand; TWN = Taiwan Province of China; VNM = Vietnam.

Box 2.1.Foreign Exchange Markets in Asia

Capital markets in Asia are supported by vibrant foreign exchange markets. Japan, Hong Kong SAR, and Singapore are among the five largest foreign exchange markets in the world; their combined turnover amounted to 21 percent of global turnover in 2013. Their prominence in the global foreign exchange market (behind only the United Kingdom and the United States, with 41 percent and 19 percent of global turnover, respectively) reflects the role of Hong Kong SAR and Singapore as regional financial centers and the Japanese yen as the third most commonly used currency globally.

Asian currencies are playing an increasingly important role in global foreign exchange markets. They accounted for 21.2 percent of global turnover in 2013, up from 16.7 percent in 2001. Asian currencies combined have surpassed the euro, which saw its share fall to 16.7 percent in 2013. The U.S. dollar has remained the prime global currency, with its share continually larger than 40 percent.

Interbank foreign exchange markets are relatively small in Asia, with transactions more oriented toward meeting nonfinancial customers’ demand for currencies. In 2013, foreign exchange transactions directly for nonfinancial entities accounted for 23 percent of total turnover in emerging Asia (14 percent in emerging market economies outside Asia) and for 10 percent in advanced Asia (5 percent in advanced economies outside Asia). This suggests that foreign exchange transactions in Asia are more underpinned by real economic need than driven by financial transactions. In addition, foreign financial institutions generally have a smaller presence in Asia’s foreign exchange trading markets. The exceptions are Australia, Hong Kong SAR, Japan, and Singapore, which are leading international hubs of currency trading, as well as New Zealand, where the banking system is dominated by Australian subsidiaries.

In addition, Asian bond markets have low levels of market liquidity, measured as the ratio of total turnover to the average outstanding amount of debt securities. Most Asian government bond markets have significantly less trading than does the highly liquid Japanese government bond market (Figure 2.7). Liquidity in corporate bond markets has generally been much lower than in government bond markets. Another challenge is the concentration in corporate bond markets, where the top 10 issuers accounted for 60-90 percent of an individual country’s total corporate bond issuance in 2013 (Levinger and Li 2014). This suggests that access to bond market funding is primarily available to large and well-established corporations. China is an exception, with only 24 percent of corporate bond issuance attributed to the 10 largest issuers.

Figure 2.7Asia: Bond Market Liquidity

(Total turnover, percent of average outstanding amounts, 2012)

Sources: Asian Development Bank, Asia Bonds Online; and IMF staff calculations.

Five of the 10 largest stock markets by capitalization in the world are located in Asia, including three in advanced economies (Australia, Japan, and Hong Kong SAR) and two in emerging market economies (China and India). They are a key source of financing for local companies. Almost 20,000 companies were listed in Asia’s stock markets as of end-2012, compared with more than 10,000 in the Americas and 13,300 in Europe, the Middle East, and Africa. New capital raised by stock issuance in Asia amounted to $198 billion in 2012, compared with $234 billion in the Americas and $102 billion in Europe, the Middle East, and Africa.

Many equity markets in Asia face weaknesses, such as limited liquidity and inefficient pricing, raising concerns about market volatility and functionality. Only four Asian markets—China, Japan, Korea, and Thailand—are more liquid than the global average (Figure 2.8). “Noise trading” also remains a key feature of most stock markets in Asia excluding Japan (see Chapter 3). Given the relatively small number of free-float shares, Asian stock markets have not yet provided strong support for wealth management to a broader range of retail and institutional investors. Furthermore, Asian stock and bond markets outside Japan are more concentrated than they are in many advanced economies. For example, the 10 largest companies in Asia accounted for 45–75 percent of the region’s total market capitalization at end-2012, compared with about 20 percent in Japan and the United States.

Figure 2.8Selected Economies: Stock Market Liquidity

Sources: Bloomberg, L.P.; and IMF staff calculations.

Note: AUS = Australia; CHN = China; HKG = Hong Kong SAR; IDN = Indonesia; IND = India; JPN = Japan; KOR = Korea; MYS = Malaysia; NZL = New Zealand; PHL = the Philippines; SIN = Singapore; THA = Thailand; VNM = Vietnam.

Foreign participation in Asia’s capital markets tends to be lower than it is in other regions. At end-2012, it was less than 25 percent in most Asian markets, except Australia, Indonesia, and New Zealand (Figure 2.9). Foreign participation was much higher in advanced Europe and North America, as well as in emerging market economies outside Asia, such as Mexico and Turkey. Similarly, foreign ownership of government debt securities tends to be lower in Asia, with foreign holdings of Chinese and Indian government bonds at nearly zero because of restrictions on inflows. The low share of foreign investors can be seen as a doubleedged sword. On the one hand, it helps contain instability caused by external funding shocks. On the other hand, it could inhibit risk sharing with a diverse investor base and limit market liquidity.7 Furthermore, even with low foreign participation in Asian capital markets, market shallowness could reduce liquidity in a number of Asian economies. For instance, it takes almost 30 days for a foreign investor to liquidate an entire position in Malaysia and the Philippines (Table 2.1). Based on this benchmark, Indonesia looks the most vulnerable given its relatively illiquid government bond market.

Figure 2.9Selected Economies: Foreign Participation in Local Capital Markets

(Percent of GDP, end-2012)

Sources: Bank for International Settlements, Debt Securities Statistics; Bloomberg, L.P.; IMF, International Financial Statistics and World Economic Outlook database; and IMF staff estimates.

1 Based on amount of portfolio investment liabilities relative to combined value of outstanding debt securities and stock market capitalization.

Table 2.1Asia: Shallowness of Local Government Bond Markets in 2012
Number of Days Needed for Foreign Investors to

Liquidate Their Entire Holding
Sources: Asian Development Bank, AsiaBondsOnline; Arslanalp anc Tsuda (2012); and IMF staff estimates.
Sources: Asian Development Bank, AsiaBondsOnline; Arslanalp anc Tsuda (2012); and IMF staff estimates.

Intermediation of Private Sector Credit

Over the past decade, total credit to private sectors in Asia has gone through two distinct phases: a modest-increase phase prior to the global financial crisis and a more rapid-rise phase in recent years (Figure 2.10).8 The first phase reflects the legacy of the Asian financial crisis, particularly in Asian emerging market economies hard hit by the crisis. The ratio of private credit to GDP increased, on average, by 7 percentage points in Asia during 2002-08, while it grew by about 40 percentage points in Europe. In the second phase, from 2008 to 2012, the ratio increased sharply in Asia, while the United States and many European advanced economies were facing a severe credit crunch. Within Asia, there has been a divergence in credit growth over the past decade. The ratio of private credit to GDP increased by 26 percentage points, on average, in advanced Asia, compared with only 18 percentage points in emerging Asia, where a longer period of deleveraging after the Asian financial crisis slowed financial deepening.

Figure 2.10Selected Economies: Private-Credit-to-GDP Ratio

(Percent of GDP)

Sources: Bank for International Settlements, Consolidated Banking Statistics, and Debt Securities Statistics; IMF, International Financial Statistics, and World Economic Outlook database; and IMF staff calculations.

Banks, underpinned by a large pool of retail deposits, remain the dominant source of credit to the private sector, accounting for an average of 84 percent of total private credit in Asia at end-2012. Bond financing and cross-border bank credit accounted for an average of only 11 percent and 5 percent of total private credit in Asia, respectively. Characteristics of credit intermediation by banks include the following:

  • Banks channel 60 percent of their total non-interbank assets to the private sector. Credit to the government and to nonresidents remains important in some countries (Table 2.2). For instance, Indian and Japanese banks have accumulated a large stock of government bonds, accounting for a quarter of total non-interbank claims. Banks in Hong Kong SAR and Singapore hold sizable foreign assets, accounting for 60 percent and 35 percent, respectively, of total non-interbank claims.
  • Retail deposits expanded and bank lending grew as deposit insurance and guarantees made this channel more attractive to savers. In most Asian economies, deposit-to-credit ratios were over 100 percent at end-2012 (Figure 2.11). The exceptions were Korea and New Zealand, where the banking sectors saw a marked increase in net foreign liabilities during 2001-08. As a result, these countries introduced macroprudential measures, including the Macroprudential Stability Levy (Korea, August 2011) and the Core Funding Ratio (New Zealand, April 2010), to discourage excess reliance on international wholesale funding and thus contain systemic liquidity risk. The large pool of retail deposits helped Asian banks weather liquidity shortages during the global financial crisis.9 It will also play an important role in putting Asian banks in a favorable position to meet the Basel III liquidity requirements, compared with peers in Europe and North America (Ötker-Robe and Pazarbasioglu 2010).
Table 2.2Asia: Composition of Banks’ Non-Interbank Claims(Percent of total non-interbank claims, at end-2012)
Claims onClaims on
TotalForeignClaims onClaims onOther FinancialPrivate
ClaimsAssetsCentral BankGovernmentInstitutionsAgents
Hong Kong SAR1006026032
Sources: IMF, International Financial Statistics; and IMF staff calculation
Sources: IMF, International Financial Statistics; and IMF staff calculation

Figure 2.11Selected Economies: Bank Credit and Deposits

(Percent of GDP, end-2012)

Sources: FinStats; Haver Analytics; IMF, International Financial Statistics; and IMF staff calculations.

Note: AUS = Australia; CHN = China; HKG = Hong Kong SAR; IDN = Indonesia; IND = India; JPN = Japan;

KOR = Korea; MYS = Malaysia; NZL = New Zealand; PHL = the Philippines; SIN = Singapore; THA = Thailand.

Corporate lending tends to outweigh household lending in Asia. Banks in China, India, and the Philippines allocated about 80 percent of private credit to nonfinancial firms at end-2012. After suffering large losses from the failure of big corporate borrowers during the Asian financial crisis, banks in some countries saw a temporary shift to household lending during 2000–05 (Mohanty and Turner 2013). As risks appeared to rise in housing markets, however, authorities actively implemented macroprudential and tax measures to contain them, which contributed to a rebound in the share of corporate lending after 2006.10

Although bank credit remains the dominant source of corporate financing, bond financing has become an increasingly important funding source for firms, accounting, on average, for 11 percent of total private credit in Asia. The outstanding balance of local-currency corporate bonds increased two-and-a-half fold from $1.4 trillion in 2003 to $3.3 trillion in 2012, representing 15 percent of GDP in Asia (Asian Development Bank 2013).11 Various factors have contributed to the recent growth of corporate bond markets in Asia. These include policy initiatives, perceived earnings potential, a large interest rate differential, and rising foreign investor interest.12 The size of corporate bond markets varies widely among Asian economies. In Korea and Malaysia, outstanding corporate debt securities amounted to 42 percent of GDP at end-2012, or a quarter of total private credit. However, the corporate bond market is still at an early stage of development in many Asian emerging market economies, such as China, India, Indonesia, and the Philippines, with share in private credit below 10 percent in these four countries.13

Direct cross-border bank lending plays a limited role. The growth of local bond markets after the Asian financial crisis provided an opportunity to move away from cross-border funding. In 2012 in most Asian economies, cross-border bank credit amounted to less than 10 percent of GDP, and, on average, about 5 percent of total credit. The exceptions were Hong Kong SAR and Singapore, where cross-border bank lending to private agents stood at about 20 percent of GDP at end-2012. Although Asia faced a larger decline in funding provided by international banks, many Asian economies—unlike many countries in emerging Europe—were able to weather an acute sudden stop of funding during the global financial crisis, given the limited role of cross-border bank credit (IMF 2011).

Targeted policies remain in place to address barriers to financial access faced by small and medium-sized enterprises. Capital market deepening has increased the options for firms but so far their use has been limited to relatively large issuers. Asian small and medium-sized enterprises often encounter poor access to finance relative to their peers in other regions. Fewer than 45 percent of small and medium-sized enterprises in emerging Asia have access to credit lines, compared with 70 percent in Latin America and 60 percent in emerging Europe. This financial exclusion is especially stark in China, where fewer than 20 percent of small and medium-sized enterprises have access to bank credit lines. The financial access of small and medium-sized enterprises has gradually improved because of government measures such as credit guarantees (Japan, Korea), mandatory lending (Indonesia, the Philippines), and coinvestments for start-ups (for example, the Spring Seeds capital scheme in Singapore). A few emerging market economies in Asia have also recently developed financial infrastructure that could promote small and medium-sized business lending, including credit information systems (the Philippines, 2011) and movable collateral registers (China, 2007).

Financial inclusion for individuals lags in emerging Asia relative to other regions, but mobile technology has begun to turn this around. Two interesting aspects follow:

  • Only 45 percent of adults in emerging Asia have bank accounts, compared with over 95 percent in advanced Asia. The disparities are even larger among rural or low-income households. Among the bottom 40 percent of income earners and those who live in rural areas, only about 30-35 percent hold a bank account in emerging Asia, compared with 90 percent in advanced Asia. Urban residents in emerging Asia generally have better access to banking services than do their rural counterparts. Gaps in access still persist, even in cities, in areas such as credit cards.
  • However, the recent growth of mobile technology has rapidly improved financial inclusion. Not only has mobile banking emerged as a convenient way to manage payments and fund transfers, it has also offered new opportunities for banks to reach unbanked customers at low marginal costs. According to Bain & Company (2012), Asia is the leader in mobile banking penetration. In several economies, including China, Hong Kong SAR, India, and Korea, more than 35 percent of survey respondents said they have used mobile banking for financial transactions—well above levels seen in other countries outside Asia (Figure 2.12).14 Given the rapid development and evolution of mobile banking, policymakers will need to ensure that secure settlement systems and proper oversight are put in place to balance technological innovation and customer protection while promoting financial inclusion.

Figure 2.12Selected Economies: Mobile Banking Penetration

(Percent of respondents reporting mobile banking transactions in the last three months, 2012)

Government Involvement

Government involvement in the financial sector is significant in many Asian economies. A number of IMF Financial Sector Assessment Programs for Asian economies have highlighted the large role of the government, particularly through ownership of financial institutions, the use of financial sector policies to foster financial sector development and influence credit intermediation, and the provision of explicit and implicit government guarantees to backstop financial institutions and enhance financial access of small and medium-sized enterprises. Some of these aspects of government involvement reflect proactive efforts to preserve financial stability and support economic development. Other government actions—such as directed lending—can distort incentives and hinder financial sector development.

The degree of government ownership of financial institutions varies widely. In major Asian economies—with the exception of Australia, Hong Kong SAR, New Zealand, and Singapore—the share of government-controlled credit institutions was at least 20 percent of the aggregate assets of credit institutions in 2013 (Figure 2.13).15 Furthermore, government ownership extends to insurance and securities companies in some countries. Factors contributing to significant government ownership vary:

  • Historical factors. In China and India, governments continue to maintain ownership of commercial banks.

Figure 2.13Selected Economies and Regions: Government Ownership of Financial Institutions in 2013

(Assets of credit institutions owned by governments as a percentage of the aggregate assets of credit institutions)

Sources: Bankscope; and IMF staff estimates.

Note: The analysis covers credit institutions with assets greater than US$5 billion available from the Bankscope database.

  • Legacy of financial crises. In countries such as Indonesia, Korea, and Thailand, which were severely hit during the Asian financial crisis, state interventions led to significant government ownership of commercial banks.
  • Policy-driven government involvement. In Malaysia, the government has large de facto interests in a number of major financial institutions through government-linked investment companies, some of which are related to the public pension system. In Japan, the government, in addition to fully owning the Post Bank, provides funding to various financing vehicles aimed at supporting the government’s social goals. Policy banks, such as development banks and export-import banks with explicit mandates, play important roles in many countries, including Korea, the Philippines, and Thailand.

Governments have considerable influence on credit intermediation because they are using or incentivizing the financial sector to support broader policy goals. This may affect both aggregate amounts and sectoral allocation of credit. The policy goals follow:

  • Managing overall credit conditions. In countries such as China and Vietnam, where monetary policy operations are not based on interest rates, administrative limits on lending remain a key policy instrument. Prudential regulation, such as penalizing banks with loan-to-deposit ratios below a specific target, has also been used in Indonesia to stimulate overall credit growth.
  • Affecting the sectoral allocation of credit. Implicit guidance, such as supervisory pressure, and regulatory measures, such as lower risk weights, are commonly used to influence commercial banks’ decisions. These directed lending practices are more prevalent in China, India, Indonesia, and Korea. Even in cases in which policy banks provide direct lending to priority sectors, excessive support is often observed (for example, housing finance in the Philippines). Moreover, some governments use policy banks to support government social programs without properly acknowledging the contingent fiscal cost (for example, subsidization of rice production in Thailand).
  • Promoting lending through guarantees. In Japan and Korea, governments set up specialized agencies to provide guarantees for credit risks of lending to small and medium-sized enterprises. In Malaysia, a similar scheme, called Cagamas, was launched to promote the local corporate bond market.

Governments have also been active in maintaining financial stability by addressing systemic risks during normal times and providing support during crises:

  • Addressing systemic risks. Following the Asian financial crisis, authorities in many Asian countries stepped up systemic risk monitoring and assessment, including the regular publication of financial stability reports. In addition, governments sometimes implement structural measures to strengthen financial systems. For instance, the Chinese government played an active role in bank restructuring in the early 2000s.
  • Providing support during stress periods. According to Standard & Poor’s “Banking Industry Country Risk Assessment Update: October 2013,” governments are highly supportive of the banking industry in all major Asian economies, except New Zealand. Asian governments are more likely to intervene than are governments in major non-Asian economies, particularly with the goal of restoring financial stability during periods of distress.16 During the global financial crisis, for example, the Japanese and Korean authorities engaged in very large scale liquidity injections and took measures to ensure continued access to finance by small and medium-sized enterprises. In Singapore, the authorities provided a temporary blanket deposit guarantee, while the Australian government offered a fee-based, unlimited guarantee for wholesale funding and large-amount deposits.

Complexity and Interconnectedness

In the run-up to the global financial crisis, Asia’s financial system was generally less complex than was those of its counterparts in the euro area and the United States. Many structural features associated with the crisis were absent (IMF 2012b). For example, the Asian financial sector did not shift toward a market-based model, but remained largely dominated by commercial banks. Asian banks also continued to rely on traditional activities such as accepting deposits and making loans rather than on sophisticated activities such as trading and underwriting. The sector was neither highly leveraged nor significantly exposed to opaque structured financial products (Jeasakul, Lim, and Lundback 2014).17 Shadow banking played only a minor role, and domestic financial entities were weakly interlinked.

Even after the global financial crisis, some aspects of Asia’s banking system have remained relatively unsophisticated. First, Asian banks continue to rely heavily on interest income, which accounted, on average, for more than two-thirds of total income at end-2012. At the same point, non-interest income—such as trading income, fees, and commissions—accounted for only 20 percent of total income, compared with more than 50 percent in Switzerland and the United Kingdom (Figure 2.14). Second, interbank linkages are lower in Asia (IMF 2013). The sum of two ratios, interbank assets to total assets and interbank liabilities to total liabilities, was about 20 percent in Asia at end-2012, less than 40 percent in the euro area, and 30 percent in Latin America.

Figure 2.14Selected Economies and Regions: Share of Net Interest Income

(Percent of total income, end-2012)

Sources: Bankscope; and IMF staff calculations.

However, Asia has been embracing financial innovation and diversification since the global financial crisis, with strong growth in shadow banking activities and structured products. Nonbank financial intermediation can enhance financial depth and broaden access to finance, and diversified financial products can make financial markets more efficient because they lead to more risk sharing. If the associated risks are allowed to grow unchecked, however, they could undermine financial stability and damage the real economy.

The rapid growth of domestic interlinkages in some Asian economies has intensified contagion risks. In China, for example, bank claims to nonbank financial institutions grew by about 50 percent during 2012-13, and commercial banks’ interbank assets accounted for 20 percent of total assets in 2013.18 The increasing bilateral exposures between shadow and traditional banks are also found in other Asian economies. Lee and Cheng (2012) show that such bilateral exposures have doubled since 2006 in Korea and the Financial Stability Board (2013) notes that funding and credit risks have increased markedly in India and Indonesia due to the linkages between commercial banks and shadow banking entities.

The use of structured foreign exchange derivatives in Asian currencies has also recently grown. Foreign exchange derivatives provide a way to hedge currency risks, but some exotic contracts may actually raise currency risk exposures. A case in point is the so-called knock-in-knock-out (KIKO) foreign exchange options, which were sold in 2006–07 to many Korean small and medium-sized enterprises seeking to hedge against a prolonged appreciation of the Korean won. As the won depreciated sharply during the global financial crisis, these contracts resulted in sizable losses. This, in turn, amplified depreciation pressures on the won, hurting other entities with open foreign exchange positions. A similar phenomenon may now be emerging in Hong Kong SAR, where the offshore renminbi foreign exchange option market has a daily turnover of about $7 billion, up from about $10 million in 2010 (Deutsche Bank 2013). Unlike the onshore renminbi foreign exchange market, in which only simple and standardized options can be traded, the offshore renminbi foreign exchange market is dominated by targeted accrual redemption notes, which are similar to the KIKO options (J.P. Morgan 2014). As happened in Korea, a sharp movement of spot rates in the offshore market may lead corporations in Hong Kong SAR to suffer nonnegligible losses and create counterparty risks for dealer banks.

Exchange traded funds (ETFs) have become increasingly popular in Asia, with assets under management growing from $53 billion in 2008 to $167 billion in 2013 (Deutsche Bank 2014). Trading volumes in Asian ETFs increased by 100 percent to $654 billion in 2013. By comparison, trading volumes in the

United States, the world’s largest ETF market, grew by less than 8 percent, though in 2013 they totaled $14 trillion. The vast majority of ETFs in Asia are the plainvanilla type, providing investors with a low-cost and efficient way to access a wide variety of asset classes. As the demand for ETFs has grown, however, so have product complexity and investors’ appetite for riskier ETFs. For example, ETFs based on synthetic replication methods have slowly become popular. The use of swaps and other derivative instruments to generate benchmark returns, instead of the passive holding of underlying assets, could complicate ETF risk assessment. In particular, opaque ETFs may create risks similar to those created by many structured financial instruments before the global financial crisis.

The level of Asia’s cross-border interconnectedness through financial linkages remains relatively limited, compared with the level in advanced Europe and North America. Gross foreign assets and liabilities in Asian economies (excluding Hong Kong SAR and Singapore) increased, but were still modest (160 percent of GDP in 2012), compared with those in the euro area and North America (430 percent and 300 percent of GDP, respectively) (Figure 2.15).19 Furthermore, emerging Asia lags significantly behind its peers. For example, the sum of gross foreign assets and liabilities was 135 percent of GDP in 2012 in Asia, compared with a sum of 420 percent in emerging Europe and 215 percent in Latin American. However, Hong Kong SAR and Singapore, two financial hubs, had correspondingly large foreign assets and liabilities (above 1,500 percent of GDP).

Figure 2.15Selected Economies: Gross Foreign Assets and Liabilities

(Percent of GDP, end-2012)

Sources: IMF, International Financial Statistics; and IMF staff calculations.

Intraregional financial linkages are limited. Asia has very strong regional trade linkages, as well as financial linkages with other regions, but financial linkages within the region are relatively small.20 Asian economies held very small cross-border portfolio investments and banking claims on each other. The intraregional linkages within Asia accounted for only 5 percent of total global bilateral positions at end-2012, far below levels observed in Europe (42 percent).21

Emerging Asia is not particularly active in interregional financial activities.22 For instance, Asian financial institutions, with the exception of Australia and Japan, held very small cross-border portfolio investments and banking claims on countries outside Asia. Such investments and claims accounted for only 3 percent of the global bilateral positions, while those in North America accounted for 14 percent at end-2012.

Global interconnectedness has risen since the global financial crisis, however. Asian economies have seen a sharp increase in cross-border financial interconnectedness, pulling global capital inflows into the region. Australian and Japanese banks are also actively filling a gap created by European banks as they retreat from the region. Gross foreign assets and liabilities in Asian economies increased by 60 percent on average during 2007–12, while some European countries (Austria, Belgium, Italy, Portugal, and Spain) saw declining positions. Asia’s portfolio investment assets grew by 40 percent during the same period, compared with a decline of 3 percent in the euro area (Figure 2.16).23 Furthermore, while cross-border bank flows to the euro area and the United Kingdom fell by 30 percent, bank flows to Asian economies (excluding Japan and Australia) increased by 60 percent between 2007 and the third quarter of 2013. Even though the Federal Reserve’s tapering announcement caused volatility in capital flows into and out of Asian emerging market economies in 2013, the overall capital inflow to Asia has remained resilient. These included inflows from Australian and Japanese banks driven by business opportunities emerging from the retreat of European banks (see Chapter 10).

Figure 2.16Selected Regions: Growth of Portfolio Investments and Banks’ Foreign Claims

(Billions of U.S. dollars)

Sources: Bank for International Settlements, Consolidated Banking Statistics on ultimate risk basis; IMF, Coordinated Portfolio Investment Survey; and IMF staff calculations.


Asia’s distinctive financial sectors raise specific concerns for the region’s governments. The region fared relatively well during the global financial crisis as a result of favorable macroeconomics, prudent supervision, and other factors. However, as in all countries, regulators and supervisors in Asia need to focus on potential instability and closely monitor and properly manage potential risks (see Chapters 5 and 11).

Because Asia’s financial sector is banking focused, regulators and supervisors must continue to ensure that banks do not jeopardize financial stability. The lessons for Asia are similar to those for other regions: it is crucial to ensure that borrowing costs reflect not only banks’ cost of capital, but also the costs of risky activities. Asia has some advantages—its banks are not as complex as those of emerging markets; it has fewer G-SIBs; and interbank linkages, both domestic and cross border, are relatively small. This may change in the future.24 Rapid growth can also be expected to shift Asia’s corporate-dominated bank balance sheets toward more household lending, necessitating the development of risk-management tools in this area.

Asia’s rapidly developing capital markets also will raise supervisory challenges. Asia’s large equity markets are already an important source of funding for large companies, but it could become more liquid and a better source for capital (see Chapter 3). The rapid development of bond markets in recent years also raises the hopes for a more diverse and disintermediated financial system that allows banks to focus on providing funding to small and medium-sized enterprises while large-company and longer-term financing move into bond markets (see Chapter 4).

To support the long-term sustainable development of Asia’s financial system, policymakers and financial market participants need to take new steps to develop domestic institutional investors. The lack of a critical mass of long-term or real-money investors has slowed the development of Asia’s capital markets. A greater presence of pension funds, insurance companies, and other institutional investors would provide an important source of funds for companies issuing securities and for infrastructure projects. It could add to secondary market liquidity, and thus price discovery as well (see Chapter 8).

The broad range of government involvement in Asia could lead to sizable public contingent liabilities. Guarantees for certain types of lending, deposits, or bonds could lead to substantial fiscal costs, especially when systemic risks materialize. Guarantees tend to be implicit and may naturally arise due to government ownership of financial institutions. A case in point is China, where there is as yet no formal deposit insurance scheme, but nevertheless recognition that deposits in the country’s largely publicly owned banking system are safe. Even in countries that have explicit financial safety nets and specialized agencies for providing guarantees, governments are widely expected to backstop potential financing gaps. Such contingent liabilities could exacerbate the negative feedback loop between banks and sovereigns during crises, when additional government supports, such as guarantees on banks’ liabilities and purchases of nonperforming assets, are extended to safeguard financial stability.

Other adverse effects of government involvement have also been identified. Government involvement can create moral hazard by reducing the perceived risk of individual activities. It might also lead to the misallocation of resources by providing distorted incentives. For example, many nonviable small and medium-sized enterprises in Korea continue to receive financing because of the government’s credit guarantee scheme for lending to small and medium-sized enterprises. Moreover, restrictions on financial institutions’ activities or on foreign participation in local capital markets appear to have hindered financial sector development in some countries. Unintended consequences also commonly arise as a result of other government policies. For instance, the regulation requiring banks to hold a substantial amount of government securities in India has led to limited liquidity in the country’s secondary government bond market.

The rapid development and evolution of mobile banking gives rise to new types of risks that need to be properly addressed. While mobile banking has helped promote financial inclusion, policymakers need to ensure that secure settlement systems and proper oversight are put in place to balance technological innovation with customer protection against cyber crime.


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1This chapter only covers Australia, Hong Kong SAR, Japan, Korea, New Zealand, and Singapore for advanced Asia; and China, India, Indonesia, Malaysia, the Philippines, and Thailand for emerging Asia.
2See Chapters 3 and 4 for the structure and growth of capital markets, and Chapter 7 for the role of the two financial hubs in Asia.
3Policy banks are financial institutions established by governments to achieve specific policy goals. Examples of policy banks include development banks, export-import banks, and postal banks.
4The data on shadow banking is collected from the Financial Stability Board (FSB 2013, 2014) and national official websites. The FSB reports note that the shadow banking system can be broadly described as credit intermediation involving entities and activities outside the regular banking system. This chapter uses this broad definition of shadow banking.
5Because long-term local-currency-denominated bonds can reduce the well-known problem of currency and maturity mismatches that some Asian economies suffered during the Asian financial crisis, policymakers have been putting considerable efforts into developing local bond markets. In 2002, the ASEAN+3 countries (includes China, Japan, and Korea) launched the Asian Bond Market Initiative, which was aimed at strengthening the regulatory frameworks and necessary market infrastructures, as well as promoting the issuance of local-currency bonds. In 2010, the Credit Guarantee and Investment Facility was established in collaboration with the Asian Development Bank to provide credit guarantees for investment-grade, local-currency bonds. See Chapter 4 for a more detailed account of various policy initiatives.
6A high figure for the share of debt securities issued internationally in the euro area (42.9 percent) is more likely to reflect a significant degree of financial integration within the currency union rather than an underdevelopment of local bond markets.
7A sudden, sizable pullback by foreign investors usually triggers market turmoil and a spike in risk premiums. The IMF’s (2014)Global Financial Stability Report also notes that portfolio flows are likely to become more sensitive to global financial conditions.
8Private credit intermediation is a process of transferring funds from an ultimate source to ultimate private users. It is estimated as the sum of (1) domestic bank claims to public nonfinancial corporations and the private sector (IMF, International Financial Statistics, line 22C and 22D), (2) cross-border bank credit to the private nonfinancial sector (Bank for International Settlements [BIS] locational and consolidated international banking statistics), and (3) debt securities issued by the nonfinancial private sector (BIS debt security statistics). See Dembiermont, Drehmann, and Muksakunratana (2013) for how to derive cross-border bank credit to the private nonfinancial sector.
9See Chapter 5 for a detailed analysis.
10Macroprudential instruments have been used more extensively in Asia than in other regions. This is particularly true of measures related to the housing market such as limits on loan-to-value ratios and caps on debt-service-to-income ratios (for example, China, Hong Kong SAR, India, Indonesia, Korea, Malaysia, Singapore, and Thailand). These instruments have helped dampen mortgage loans and slow the growth of housing price (Zhang and Zoli 2014).
11Corporate bond issuance increased from 2 percent of GDP in 2010 to over 3.5 percent in 2012, while newly originated long-term syndicated bank loans fell from 2.5 of GDP to below 2 percent over the same period (Levinger and Li 2014).
12See Chapter 4 for detailed information.
13From 2008 to 2012, the size of domestic corporate debt securities doubled in China to 10 percent of GDP, but their contribution to private credit is much smaller than is bank lending to private agents, which is 130 percent of GDP.
14In 2008, Jibun Bank was launched in Japan as the first virtual bank in the world. Founded by a joint partnership between Bank of Tokyo-Mitsubishi UFJ and the telecommunication company KDDI, Jibun Bank offers various banking products and services exclusively for its customers over mobile phones.
15The analysis is based on the controlling power of governments over credit institutions, which include banks and other financial institutions that provide credit. Hence, it does not present a picture of the exact amount of government shareholding in financial institutions. In particular, in Singapore, the government has a sizable stake in the DBS Bank, its largest bank, with no controlling power.
16Governments in major economies in other regions, both advanced and emerging market, are considered to be only supportive to the banking industry in their jurisdictions.
17For instance, Asian financial institutions’ subprime-market-related losses and write-downs amounted to $27 billion, only 3 percent of total losses and write-downs by the top 100 banks and securities firms around the world.
18IMF (2011) shows that Chinese money markets are actively used by many small and medium-sized banks (and nonbank financial institutions) to fund their activities, and by large banks to place their surplus funds.
19In many Asian economies, foreign assets are largely in the form of official foreign reserves. For example, in China, India, Japan, Korea, Malaysia, and the Philippines, foreign reserves reached 20–50 percent of GDP at end-2012, representing over 16–70 percent of foreign assets.
20In terms of trade linkages, IMF (2012a) shows that Asian economies are tightly interconnected intra- and interregionally, with China as a core and a gatekeeper of the cluster. Over the past two decades, intraregional trade among the Asian cluster economies has grown strongly.
21Total global bilateral position is calculated as the sum of cross-border portfolio investments from the Coordinated Portfolio Investment Survey and cross-border banking claims from the BIS locational banking statistics. The position can be divided into two types according to location. One is the cross-border position between two countries within a region, or intraregional linkages, and the other is the cross-border position between two countries in different regions, or interregional linkages. The two positions accounted for 51 and 49 percent of total global bilateral positions, respectively, as of end-2012.
22Japan, however, acts as a global lender and investor, holding 12 percent of cross-border banking claims and 10 percent of portfolio investments vis-à-vis the rest of the world, Australia plays a role as a regional lender and investor, providing 14 percent of the banking claims vis-à-vis Asian economies at end-2012.
23Asia’s portfolio investment liabilities grew by 23 percent over the same period, compared with a decline of 4 percent in the euro area.
24Chapters 6, 9, and 10 provide details on Asia’s financial sector.

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