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IDEAS FOR LEADERS PP 17327/05/2013(032407)
JUNE 2015
SAFEGUARDING
PRIVATE
RETIREMENT
SCHEMES
CAN WE
BE MORE
INCLUSIVE?
TOWARDS ASEAN
FINANCIAL
INTEGRATION:
EVOLUTION, NOT
REVOLUTION
TRUSTING THE
ZETTABYTES
ON A MISSION TO
BANK THE
UNBANKED
A PUBLICATION OF
PREPARING
FUELLING FOR
RISK CYBERGEDDON
CHARTERED BANKER The gold standard in banking qualification. The most prestigious professional qualification in banking, Chartered Banker is jointly awarded by the Asian Institute of Chartered Bankers and Chartered Banker Institute, the only professional banking institute in the UK. It is a badge that stands for a high standard in competency and integrity and is worn with great pride. Our online programme provides the flexibility that allows you to qualify as you work. Enrolment is ongoing, become a Chartered Banker today! For more information and to register, please visit us at www.aicb.org.my Phone: 03�2095 6833 | Fax: 03�2095 2322 | Email: marketing@aicb.org.my www.aicb.org.my www.facebook.com/TheAICB TheAICB Asian Institute of Chartered Bankers
Editor’s
Note
Championing Financial Inclusion
With equitable growth accorded priority in the issue’s focus on cybersecurity examines the measures being
development discourse, it is perhaps the right time to advocate undertaken by regulators and banks to shore up defences against
financial inclusion as a strategy complementary to other inclusion cybercriminals, stressing the need to be more vigilant in the Asia-
strategies more intensively. After all, sustainable growth only has Pacific region to prepare for the perils of ‘cybergeddon’.
meaning if its rewards can be shared by all. Other than cyber risks, arguably the foremost fundamental risk
Currently, the Global Partnership for Financial Inclusion (GPFI) is reputational risk, underpinned by ethical risks. Dr. Raymond
estimated, based on the World Bank Global Financial Inclusion Madden, Chief Executive Officer, Asian Institute of Finance (AIF)
Index (Global Findex) Database, that 2.5 billion adults globally or says that bank stakeholders the world over are asking what banks
approximately half the total adult population lacked access to can do to strengthen the ethical culture within their organisations.
financial services delivered by regulated financial institutions. Indeed, prudent ethical behaviour is obligatory, not least because
Banking the unbanked represents a massive opportunity for banks serve as a major financial intermediary for the general
development through financial inclusion. Allowing broad access public. Dr. Madden makes the point that banks must embed a
to financial services has been shown to benefit poor people and strong ethical culture, with the drive for high ethical standards
other disadvantaged groups by enabling them to consume more, starting at and being driven by the top echelon of each bank. The
manage health concerns, make investments in durable goods, pay-off of a strong ethical culture is the minimisation of risks to the
make home improvements or benefit from education. The GPFI also banking organisation.
noted that macroeconomic evidence shows that economies with With the imminent materialisation of the ASEAN Economic 3
deeper financial intermediation tend to grow faster and are able to Community (AEC), this issue also feels it important to revisit the
reduce income inequality. state of ASEAN regional financial integration. The integration
BANKING INSIGHT + June 2015
This issue of Banking Insight contains insights on this subject from process has incorporated some critical milestones, such as the
Alfred Hannig, Executive Director of the global Alliance for Financial establishment of the ASEAN Banking Integration Framework
Inclusion (AFI). Hannig provided his perspective on the necessity (ABIF), due to be implemented in 2020, which should boost
of advocating financial inclusion, the tools and technologies being cross-border banking activity. Read on to find out the progress
leveraged, the outcomes of successful financial inclusion initiatives, achieved to date, the challenges that must be overcome, and the
and the risks and challenges moving ahead. He noted that financial opportunities which are still unfolding.
inclusion is a circular process: the long-term goal of financial However, true regional harmonisation and integration cannot
inclusion, Hannig said, was to see concrete policy changes in the be achieved without diminishing the economic disparities
countries where AFI is active in reducing poverty and supporting between ASEAN nations and their populations. Coming full circle,
inclusive growth – which starts with sustainable financial inclusion. this is where financial inclusion can contribute. Even as banks
Unsurprisingly, Hannig commented extensively on technology, play their primary role as major financial intermediaries for the
a key driver for financial inclusion. Recent technology and general population, they can provide access to finance to bridge
applications like mobile phones and electronic purses have economic gaps and stimulate economic activity in support of
successfully expanded the delivery of basic financial services, ASEAN’s pursuit of its vision of becoming an influential global
bypassing traditional branch and banking models, and improving economic bloc.
access to finance for remote and hitherto under-served populations. We hope you enjoy this issue. We welcome all feedback at
But technology can be a double-edged sword. As technology and publish@aicb.org.my. Q
the internet become increasingly ubiquitous channels for delivering
banking services, banks and their customers and stakeholders Hope you have a fruitful read.
in turn become increasingly vulnerable to cyber-attacks. Hence,
cybersecurity must be augmented to better manage risks. This The Editor
We want to hear what you Why not drop us a line Visit us online at our
have to say on Banking Insight. now? e-mail: new website
publish@aicb.org.my www.aicb.org.my
Ideas for Leaders
pg 40
THE COUNCIL OF AICB EDITORIAL ADVISORY
CHAIRMAN
PANEL
YBhg Tan Sri Azman Hashim, FIBM Chairman
Chairman, AmInvestment Bank Berhad Dr. Raja Lope Raja Shahrome, FIBM
Director
VICE CHAIRMAN OCBC Bank (Malaysia) Berhad
Datuk Abdul Farid Alias
Group President/Chief Executive Officer Panel Members
Malayan Banking Berhad
Dato’ Dr. R Thillainathan, FIBM
Independent Non-Executive Director
MEMBERS
Genting Berhad
Mr. Donald Joshua Jaganathan, FIBM
Assistant Governor, Bank Negara Malaysia
Datuk Khairul Anuar Abdullah
Independent Non-Executive Director
Tan Sri Dato’ Sri Tay Ah Lek, FIBM
Standard Chartered Bank Malaysia
Managing Director, Public Bank Berhad
Berhad
Datuk Mohamed Azmi Mahmood, FIBM
Acting Group Managing Director Dr. Cheong Kee Cheok
AMMB Holdings Berhad Senior Research Fellow
Faculty of Economics
Datuk Mohd Najib Haji Abdullah University of Malaya
Group Managing Director/Chief Executive
Officer, MIDF Amanah Investment Bank Berhad Mr. Philip T N Koh
Senior Partner
Mr. Wong Kim Choong Mah-Kamariyah & Philip Koh
4 Chief Executive Officer
United Overseas Bank (Malaysia) Berhad Dr. Bala Shanmugam pg 26
Finance Consultant
BANKING INSIGHT + June 2015
Mr. Tan Kong Khoon
Group Managing Director/Chief Executive
Hong Leong Berhad
Mr. Ong Eng Bin
Chief Executive Officer
OCBC Bank (Malaysia) Berhad
Editor | Tay Kay Luan Printer BRANCHES
Assistant Editor | Shireen Sharmani Kandiah Percetakan Lai Sdn Bhd AICB Penang Branch
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Wisma IBI, 5 Jalan Semantan, Damansara Heights those of AICB or its Council. Contributions including letters Email:
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Contents
June 2015
Prospect
Prospects
06 Insights
08 Unlocking the World’s Greatest
Emerging Economy
12 Securitisation Makes a Comeback
16 Fuelling Risk
20 Towards Asean Financial Integration:
Evolution, Not Revolution
pg 32
Governance
26 Safeguarding Private Retirement
Schemes
32 Preparing for Cybergeddon
Thought Leadership 5
40 Can We be More Inclusive?
BANKING INSIGHT + June 2015
Yes, we will have to be. Following its selection as the permanent
headquarters for the global Alliance for Financial Inclusion (AFI),
Malaysia will have to place itself at the forefront where driving
financial inclusion is concerned.
44 On a Mission to Bank the Unbanked
48 A Strong Ethical Culture in Banking pg 48
Management
52 Lean Banking – Needing Less to Do
More for the Customer
Technical
56 Dark Pools and High-Frequency Trades:
Shining a Light on Dark Pools
62 Trusting the Zettabytes
Data, analytics and technology are becoming even more central
to the operating model of financial services organisations. What
are the important implications of data and analytics for banks?
pg 52
Prospects insights
Massive Drop in Number of Unbanked
From 2011 to 2014, 700 million people
became account holders at banks, other
financial institutions, or mobile money
service providers, and the number of
‘unbanked’ individuals dropped 20% to
two billion adults, according to the latest
edition of the Global Findex, the world’s
most comprehensive gauge of progress on
financial inclusion.
Financial inclusion is measured by the
Global Findex as having an account that
allows adults to store money and make
and receive electronic payments. “Access to
financial services can serve as a bridge out countries were still without in South Asia, where 37% of women
of poverty. We have set a hugely ambitious accounts in 2014. have an account compared to 55% of
goal – universal financial access by 2020 • The gender gap in account men.
– and now we have evidence that we’re ownership is not significantly In 2011 the World Bank – with funding
making major progress,” said World Bank narrowing: In 2011, 47% of women from the Bill & Melinda Gates Foundation
Group President Jim Yong Kim. and 54% of men had an account; and in partnership with Gallup, Inc. –
6 The 2014 Findex also found that: in 2014, 58% of women had an launched the Global Findex in over 140
• More than half of adults in the poorest account, compared to 65% of men. countries to study how adults save, borrow,
40% of households in developing Regionally, the gender gap is largest make payments, and manage risk. Q
BANKING INSIGHT + June 2015
Favourable Prospects
for Malaysia’s
Diversified Economy
After a year of very strong Inflationary pressures are expected
growth of 6%, lower energy to remain subdued, helped by lower
export prices in 2015 will likely oil and gas prices. Activity will be led
contribute to Malaysia’s growth by consumption and growth in private
moderating to a still impressive rate investment in the non-oil sector,
of close to 5%, said IMF economists in which is likely to benefit from lower
March 2015. energy costs and higher prices of non-
In their annual report on the commodity exports.
health of the Malaysian economy, Private consumption growth is
the report’s authors say growth is likely to moderate, reflecting the net
expected to moderate to about 4.75% effects of lower commodity prices,
this year while headline inflation will the impact of the new GST, and slower
likely increase slightly to about 3.25% credit growth, as financial conditions
in 2015 as a result of an end to fuel tighten, but remain accommodative.
subsidies, the introduction of a Goods The report’s authors added that the
and Services Tax (GST), and exchange current macroeconomic policy mix
rate depreciation. was appropriate. Q
Capital
Markets
in 2020
PwC’s report ‘Capital Markets 2020: Will
It Change for Good?’ predicts a new equilibrium
for global capital markets, the landscape,
composition and dynamics of which will look very
different to that of today come 2020.
PwC highlights that the new equilibrium will
emerge in terms of innovation, technology,
industry structures, business models, financial
BAFT Launches structures, products, and remuneration.
Its global survey of 250 capital market
International executives and industry leaders found that
executives are highly concerned by the threat
Suspicious Activity posed by shadow banking players such as 7
Guidelines
BANKING INSIGHT + June 2015
BAFT, an international financial services
association, has announced its ‘Guidance for Identifying
Potentially Suspicious Activity in Letters of Credit and Documentary
Collections’. The guidance, developed by BAFT’s Best Practices
Anti-Money Laundering Know Your Customer working group,
is designed to assist the international
banking industry when combatting
One of the
money laundering and financial crime. challenges
The BAFT working group reviewed banks face with
the red flags and risk indicators implementing
global compliance
identified by various industry bodies policies is trying to crowd funders and peer-to-peer lenders. 70%
in different regions globally including interpret guidance believe they pose a moderate to severe threat
the Federal Financial Institutions from multiple to traditional banks with 16% indicating they
industry bodies.
Examination Council , Financial Action believe this shadow banking world may be set
Task Force, the Wolfsberg Group and to expand beyond its current 25% market share
the Financial Conduct Authority to provide clarity for international of financial assets. Just 20% believe they present
banks to consider when implementing trade compliance policies. innovative partnership opportunities.
BAFT combined the key points from the above groups into 16 Despite shifts in global gross domestic
red flags to raise banks’ awareness of what to look for to assess profit and economic power, liquidity pools will
suspicious activity in trade transactions. continue to aggregate in established global
“One of the challenges banks face with implementing global financial hubs. Whilst the majority (76%) expect
compliance policies is trying to interpret guidance from multiple a financial centre rivalling London and New
industry bodies,” said Tod Burwell, BAFT President and CEO. “This York to emerge, PwC is confident both cities will
document aims to simplify guidance from a variety of regulatory continue to lead the global financial ecosystem
and standard setting authorities in a way that facilitates more through to 2020. Q
effective policies and procedures.” Q
Prospects
Unlocking the
world’s greatest
emerging
economy
The establishment of the ASEAN Economic
Community (AEC) presents unparalleled
opportunities for growth for businesses. In this
upcoming integrated market valued at over USD2.4
8 trillion as of the time of writing, where do openings
lie, and what must companies and governments do
BANKING INSIGHT + June 2015
to realise the opportunities?
T
he 10-member Association be launched in December 2015, many piece of the lucrative ASEAN pie. Feisal
of Southeast Asian Nations banks and financial institutions see the Zahir, Maybank Head of Global Banking
(ASEAN) is home to upcoming single market as an opportunity explained that intra-ASEAN foreign direct
one-tenth of the world’s for growth and progress. For example, investment (FDIs) has been steadily
population. And if it were Maybank, Malaysia’s largest bank is fast increasing over the past five years, from
a single country it would be the seventh expanding across the ASEAN bloc of about 10% of total FDIs into ASEAN in
largest economy in the world. By 2030, emerging economies. 2009 to an estimated 22% in 2014. “FDIs
the region’s citizenship will grow by Recently, Maybank Group President into ASEAN also increased from USD91
one-third, from 620 million today to 900 and Chief Executive Officer Datuk Abdul billion in 2011 to an estimated USD123
million, with GDP quadrupling from Farid Alias described ASEAN as a huge billion in 2014, which further indicates a
USD2.4 trillion to USD10 trillion by then. marketplace and home to a very large potential for continuous growth.”
Malaysian Prime Minister, Dato’ Sri supply of rising middle-class consumers “Maybank is well positioned to capture
Mohd Najib Tun Abdul Razak, describes with discretionary spending. “The the increase in business in the region and
ASEAN as: “Without doubt, the world’s region is the world’s seventh largest those linking to Asia. We have a deep
greatest emerging economy.” He said: economy and has been experiencing understanding of the business landscape
“Everyone from an equity analyst in strong economic growth rates. To in ASEAN, as well as, the products to
Singapore, a rice farmer in Thailand, a integrate into this regional powerhouse, provide seamless solutions for corporate
halal food business owner here in Kuala it takes disruptive technology, effective trading, funding and investment needs,”
Lumpur, SMEs and business leaders branding and strategic advertising. The he said.
throughout our region, should be aware rising empowerment of women and the Meanwhile, Maybank Kim Eng Group
of the shared growth and prosperity that demographic implications of millennials Chief Executive Officer John Chong said
the ASEAN community aims to enable, are also crucial to capitalise on ASEAN,” ASEAN’s economic integration could
and have access to this potential.” he said. bring about an increase in corporate
Little wonder then that with ASEAN Foreign direct investment is also rising exercises, which bodes well for the
integration looming in the shape of as investors diversify away from lagging banking and financial industry and the
the ASEAN Economic Community to developed economies in search of a development and maturity of capital and
financial markets in the region. “We implementation of a single time zone; businesses must embrace disruptive
expect to see more merger & acquisition educating the region’s young population technologies like social media and mobile
activities as businesses in the region about the benefits of ASEAN; developing tools, in order to meet the needs of the
consolidate. Fund raising exercises will new infrastructure projects; and for the region’s increasingly tech-savvy populous;
also rise, driven by businesses’ regional bloc to have its own presence at global on the other, companies must modify their
expansion and new infrastructure summits like the World Economic internal structures in order to meet the
demand,” he said, adding that Maybank Forum in Davos, Switzerland. high expectations of Millennials in areas
Kim Eng was proud to be able to provide like career progression, meritocracy,
investors with unrivalled access to this The Human Factor ethics and continuous feedback.
region. Maybank Kim Eng, the investment Perhaps one of the factors that makes
banking arm of Maybank maintained the AEC such a compelling initiative Businesses Must Take Action
its position as ASEAN’s largest equities is ASEAN’s youthful demographic The ability of ASEAN to shift the AEC
franchise with the highest trade value in and rising middle-class, both of which from drawing board to reality is critical
2014, for the second successive year. are catalysts for economic and social for the future prosperity of the region. Yet
development. Presently, more than 60% of while it is the responsibility of member
‘Be ASEAN’ the region’s population – more than 370 governments to promote the concept of
While the concept of integration carries million citizens – are aged between 18 ASEAN, the onus of driving its potential
immense potentials, much has to be and 34, an age group otherwise referred rests with businesses, irrespective of
done to overcome economic and social to as Millennials. And there are around size or sector. As one of the growth
disparities among the ASEAN members 81 million consumer-class households engines and key pillars of the Malaysian
in order to align them and smoothen across the region, with this number set to economy, Maybank is committed to
harmonisation in the run-up to the double within 15 years. doing its utmost and engaging with its 9
launch of the AEC just a few months Being able to relate to both of these stakeholders to facilitate the realisation of
away. Central to integrating these demographics is critical for companies the AEC blueprint, and hence, catalysing
BANKING INSIGHT + June 2015
diverse economies is the concept of ‘one doing business in ASEAN: on one hand, ASEAN growth. Q
ASEAN’. Datuk Abdul Farid stressed that
in order to achieve this, member nations
and local businesses must engage with About Maybank
one another, foster greater collaboration, Maybank is among Asia’s leading banking groups and Southeast Asia’s
and accept that the long-term vision of fourth largest bank by assets. It has been ranked among the World’s Top
an integrated and united ASEAN has
20 Strongest Banks by Bloomberg Markets for two consecutive years
already arrived.
Currently, there is a long way to go to - 2013 and 2014. The Maybank Group has an international network of
achieve ASEANisation. “As individual 2,400 offices in 20 countries namely Malaysia, Singapore, Indonesia,
countries, we trade and invest more with Philippines, Brunei Darussalam, Vietnam, Cambodia, Thailand, Papua
countries outside ASEAN than within,”
New Guinea, Hong Kong SAR & People’s Republic of China, Bahrain,
remarked the CEO, explaining that
trade between member states presently Uzbekistan, Myanmar, Laos, Pakistan, India, Saudi Arabia, Great Britain
accounts for only one-quarter of regional and the United States of America. The Group offers an extensive range
commerce. He encouraged companies, of products and services, which includes consumer and corporate
governments and citizens to seek new
banking, investment banking, Islamic banking, stock broking, insurance
partnerships with peers from other
member nations, and to “be ASEAN”. and takaful and asset management. It has over 47,000 employees
Without “being ASEAN”, the serving more than 22 million customers worldwide.
idea of the AEC will not come to full
fruition. Ambitiously, the AEC initiative
encourages free flow of goods and
services, and freer movement of capital
and skilled labour, and these can only
be achieved if all stakeholders work
together cohesively.
Other integrative measures proposed
by business leaders include the
Prospects
Securitisation
makes a comeback
n Jessica Furseth
The return of securitisation: Does the villain
from the global financial crisis deserve
another chance?
12
T
he big villain of the 2008 toxic sludge
financial crisis was not a
BANKING INSIGHT + June 2015
masked creature in a hood, but
Not everybody
an until-then unremarkable understood how it
financial product known as worked, but soon
securitisation. Not everybody securitisation was
understood how it worked, but soon
labelled as ‘toxic
securitisation was labelled as ‘toxic sludge’,
responsible for creating an instability in the
sludge’, responsible described securitisation as “a financing
financial markets which spiralled into a global for creating an vehicle for all seasons” that should no
recession. After a public lynching of this instability in the longer be thought of as a “bogeyman”.
scale, the news that securitisation is making a financial markets ECB President Mario Draghi followed
comeback is somewhat ironic. up by saying the restrictions have been
which spiralled into a
With memories fresh from the downturn, “discriminating asset-backed securities
it is no wonder that critics are fearful that
global recession. After against other very similar instruments,
welcoming securitisation back in from the a public lynching of such as covered bonds”.
cold means that painful lessons have been this scale, the news
forgotten. But financial commentators claim that securitisation is Welcome to EU Reform
there is nothing inherently unsafe about these While the previous six years saw the
making a comeback is
so-called securitised financial products. In securitisation market almost double to
fact, the transformation of mortgages, credit
somewhat ironic. £6.6 trillion in the US, and quadruple
card debt and other recurring cash flows to £1.6 trillion in Europe, outstanding
into new marketable securities can be a very securitisation contracts have sharply
useful tool for getting credit flowing and contracted since the crisis. This
boosting growth. was partially due to their unsavoury
The desire to encourage economic growth reputation, but also because regulators
is also the reason why the Bank of England in the EU and US cracked down so hard
(BoE) and the European Central Bank (ECB) on the industry, they nearly killed it.
have thrown their weight behind the budding Because of this, the securitisation market
resurgence of securitisation. Andy Haldane, will need a boost if it is to recover.
Chief Economist at the BoE, last year In a joint discussion paper entitled ‘Theby the regulations initiated after the
financial crisis. This illustrates that while
securitisation may be returning, no one
is pretending that it can go back to the
way things were in the past - lessons have
indeed been learned. Out of the so-called
alphabet soup of acronyms from the pre-
crisis securitisation boom, only two are
so far making a comeback. Most popular
is ABSs, or asset-backed securities,
which is generic securitisation including
credit card debts. Second is CLOs, or
collateralised loan obligations, which
includes loans to poor-credit firms such
as those acquired by private equity. The
two more problematic products have so
far been left on the shelf: these being
MBSs, the mortgage-backed securities
which were the culprit in the subprime
crisis, and CDOs, the collateralised
debt obligations disliked by regulators
because they were made up of bundles
of other securities. 13
Selections from the
BANKING INSIGHT + June 2015
Alphabet Soup
ABSs and CLOs have been enjoying
a steady revival since 2013, and the
temptation to encourage them to grow
further in order to boost economic
growth is strong, especially in Europe.
This may not necessarily be a problem,
as in its simplest form, securitisation is
not complicated. For example, a bank
collecting monthly payments on a
credit card or car loan can access cheap
financing by selling the claim to these
payments on to investors. By selling it
on in bundles, a bank or business can
use its existing debts to access credit,
which can then be used to boost growth.
Case For A Better Functioning Securities needs a thorough revamp. First of all, It was only when certain US banks grew
Market In The European Union’, the BoE this means creating products that are complacent about credit checks that
and ECB highlighted the advantages of simple and transparent to investors. this process became problematic, as
bringing back the financial instruments: Secondly, banks need to be incentivised customers continued buying the debt
“Securitisation can support greater to monitor and be prudent about the bundles without realising the underlying
funding diversification, free up capital loans they package into securities, and mortgages were subprime, and often
to allow banks to extend new credit to thirdly, investors need to have access worthless.
the real economy, and provide non-bank to enough historical data to understand The prospect of using securitisation to
investors, such as insurance companies how the loans that make up the basis of boost the European economic recovery
and pension funds, with access to a their securitisation will perform across a was a key aspect when European
broader pool of assets.” wide variety of circumstances. Commission member Jonathan Hill
In order for this to happen, said the Many of these concerns have already presented the green paper on the EU
BoE and ECB, the securitisation market been addressed, at least partially, Capital Markets Union in February. “WePROSPECTS n securitisation makes a comeback
are seeking to encourage the development of an appetite returns. However, the reaction by
EU market for high-quality securitisation, which banks to the various new requirements is still
is transparent, simple and standardised,” said uncertain. Banks will need to retain interests
Hill, pointing out how a return to just half the under risk retention [rules] but will also need
level of SME securitisation seen in 2007 would to deduct amounts from capital under Volcker
result in an extra €20 billion in funding. EU and meet liquid coverage ratio requirements.”
regulation post-crisis requires banks to retain at But, added Filomia-Aktas, the US securitisation
least 5% of the loan risk when selling securitised market is poised to be “a strong contributor” to
products, as well as set aside more capital economic recovery, in spite of these challenges.
against the instruments. Hill has warned against While there are many similarities in
speculation that the fundamental rules will be the approach to reducing the risk in the
changed, but his comments have spurred hope securitisation markets in the US and EU, the
that some lightening of the regulatory burden differences reflect the roles these two regions
may be on the cards. played in the actions leading up to the crisis.
The European Commission wants to reduce In the US, regulation seeks to protect the
the region’s reliance on bank funding, and investor by focusing on moderating the issuer,
securitisations may be a way to create a more whereas the EU regulator takes a more indirect
diversified financial market where funding approach, looking to protect EU investors from
and risk is distributed more evenly across the exposure from securitised products issued in
system. Hill pointed out that in pre-crisis Europe, any jurisdiction.
only 2% of securities were defaulting. However, According to Peter Green, Partner at
Hill assured any return of securitisation will international law firm Morrison Foerster, “The
14 take a different shape than what we saw before: European approach reflects the fact that during
“We will not be going back to the bad old days the financial crisis, European securitisation
of subprime mortgages. Our door will remain assets performed well, and that losses suffered
BANKING INSIGHT + June 2015
firmly closed to the highly complex, opaque and were due to exposure to securitised assets
risky securitisation instruments which were from other jurisdictions, such as the US, over
part of the crisis.” which European authorities can have no direct
control.” The European approach is not without
Keeping Some Skin in the Game its problems, added Green: “It is difficult for
complicated European investors to ascertain whether or not
If securitisation is no longer the villain in the
story, US subprime mortgage lending still the originator or sponsor is complying with the
Securitisation
carries much of the blame for sparking the risk retention requirement.”
recession. The Dodd-Frank Wall Street reform transactions are
from 2010 meant that securitisation issuers have very complicated Fresh Approaches in Asia
to retail 5% of the risk, adhering to the so-called and have multiple Asian securitisation markets have also seen a
‘skin in the game’ rule as mandated by the G20 participants. A tentative resurgence in the past few years. In
summit the year before. The requirement is China, securitisation was stopped entirely in 2009
specific law for
intended to provide an incentive to monitor and in response to the crisis, but was restarted three
control the quality of securitised assets, and securitisation is years ago as a tool for diversifying financing for
align the interests of the issuer with those of needed. infrastructure, agriculture and small businesses.
investors. The finalisation of the Volcker rule Last year saw Chinese securitisation issuance
in December 2013, which touches on certain reach its highest level since its start in 2005;
types of securitised products, was a relief for however, there are calls for a stronger legal
the finance industry because it removed a lot of framework:
uncertainty around regulation. This has paved “Securitisation transactions are very
the way for a period of re-emergence: complicated and have multiple participants.
“The structured finance market is beginning A specific law for securitisation is needed,”
to rebound as the path forward becomes Ba Shusong, Chief Economist for the China
clearer,” said Lisa Filomia-Aktas, Head of the Banking Association and Deputy Director of the
Financial Services Office On-call Advisory Financial Research Institute at the Development
Services group at EY (formerly Ernst & Young). Research Centre of the State Council, wrote
“The US securitisation market is re-emerging in a PwC report. “Securitisation is a business
as legislative progress is made and investor across many industries; the cooperation betweenPROSPECTS n securitisation makes a comeback
has been made out to be, and it would be
foolish to dispose of what is essentially an
efficient financing tool. Bringing back the
more harmless securitisation vehicles,
like ABSs and CLOs, may well be the
solution, while at the same time excluding
the products more directly linked to the
troubled history of this asset class.
Neither is a repeat of overregulation
desirable. The responses from US and EU
regulators were swift and harsh after the
financial crisis hit, resulting in the near-
death of the securitisation industry, in an
effort to save the overall economy. “This
response was perhaps understandable. It
is undeniable: what happened with the US
subprime market was a disaster. But the
problem is that Europe was tarred with
the same brush,” noted Richard Hopkin,
Managing Director of the Securitisation
Division of the Association for Financial
regulators and coordination by one single Chief Executive, Securities Commission Markets in Europe. Hopkin pointed to
department may be a way out.” Malaysia. Because Islamic finance rules the apt metaphor used by Yves Mersch, 15
Ongoing government support, the would prevent outright speculation, Member of the ECB Executive Board,
accumulation of experience, and growing securitisation would be prevented from who argued the crackdown of ABSs in
BANKING INSIGHT + June 2015
demand from investors mean the Chinese sliding back towards the patterns which Europe had been exaggerated: “This
securitisation market is set to continue led to the financial crisis. “There is a regulation is like calibrating the price of
growing, according to Vera Chaplin, golden window of opportunity for Islamic flood insurance on the experience of New
Managing Director of Structured Finance securitisation to lead the way,” Dato Dr. Orleans for a city like Madrid.”
at Standard & Poor’s Ratings Services: Nik Ramlah said during her keynote The question, argued Hopkin in the
“We believe Chinese regulators will speech to the Islamic Financial Services ‘Financial Times’, is perhaps not whether
adopt a cautious approach to developing Board in Brunei last year. securitisation is safe again, but whether
the market. We expect regulators to She further mentioned that, “By its the regulatory actions that stifled the
focus on aligning the products with the very nature, Islamic securitisation offers industry were too broad. “Securitisation
government’s economic and financial all the benefits of securitisation without is safe, absolutely, and in Europe they
market reform initiatives, instead of simply some, if not all the weaknesses that led to have always been safe. If you look at
providing new financial instruments.” the subprime crisis.” While it is still very the historical performance of prime
Chinese regulators have adopted the early days for the development of Islamic residential mortgage-backed securities
same ‘skin in the game’ rule as in the US securitisation, Dato Dr. Nik Ramlah in Europe, the default for that asset class
and EU, Chaplin wrote in ‘FinanceAsia’: highlighted its potential to act as “the over the last seven years has been only
“The administrative initiatives introduced catalyst for the revival of the securitisation 10 basis points.” A negative effect of the
by regulators in China are generally market”. By automatically excluding the crackdown on securitisation was a crunch
consistent with those in the global more complex structures, such as CDOs, on credit available to small and medium-
market, and have been introduced in Islamic products would serve as a “natural sized enterprises, which make up 99.7%
parallel with other markets. This suggests risk mitigant” for investors. of all businesses in the EU. A cautious,
that Chinese regulators are planning to managed return to securitisation could
develop a local market that operates in A Careful, Selective Outlook contribute to lessen Europe’s dependence
line with global operating standards.” On the whole, the return of securitisation on banks for financing, argued Hopkin,
However, regulation may not be the appears to be accompanied by a healthy and in turn this could improve the
only way to remedy securitisation’s dose of caution - no one wants to risk a availability of credit and spur economic
tarnished reputation. An alternative repeat of the events leading up to the growth. Q
way to achieve this could be through global financial crisis. But there is also a
Shariah-compliant structures, noted broad consensus in the financial industry n Jessica Furseth is a freelance journalist
Dato Dr. Nik Ramlah Mahmood, Deputy that securitisation is not nearly as bad as it based in London.Prospects
fuelling
Will the
deflating oil
sector boom
cause a new
risk
bust for banks?
16
BANKING INSIGHT + June 2015
W
ho are the prices], it is likely to be an additional 0.8% But while the global economy may
winners and [in economic growth] for most advanced improve overall, there are plenty of
losers as the economies,” said Lagarde. Speaking at a countries where the declining oil
oil price keeps ‘Wall Street Journal’ conference, Lagarde price will be a negative. Russia, Iran,
falling? On a listed the US, Europe, Japan and China Venezuela and Nigeria were among
global scale, the as economies particularly likely to see exporters highlighted by Lagarde as
overall effect will an upside, which is the case for most countries whose economies could
make us winners, at least according to countries who are net importers of oil. become vulnerable if the downward
Christine Lagarde, Managing Director A price of USD40 per barrel would mean trend continues. Not to mention that the
of the International Monetary Fund a likely USD1.3 trillion shifting from price of crude has declined further since
(IMF). Lagarde made headlines in producers to consumers through direct Lagarde made her comments; at the time
December 2014 when she noted that savings at the petrol pump, according of writing, prices are down more than 50%
falling oil prices would be a positive to estimates from the ‘Economist’, as since the fall started last June. After five
factor for the global economy: households are left with more cash to years of price stability, this downward
“Assuming we have a 30% decline [in oil spend on other goods and services. trend has come mainly on the back ofParallel
There is a stark parallel
with the US property
improved supply; shale oil production market collapse that
has gone up, and OPEC (Organisation of heralded the start of the
the Petroleum Exporting Countries) is 2008 global financial
resisting a cutback on production to shore crisis - and upended
up prices. banks along the way.
While cheaper oil products has led
to more cash for consumers to spend
elsewhere, energy companies are feeling
the squeeze on their finances. Banks
are benefiting from the former, but the
latter is causing headaches, as the until- conditions. Barclays and Wells Fargo
recently stable energy sector had been a have been left with losses as high as 40%,
according to estimates from the ‘Financial
Times’.
solid source of work for banks after the
financial crisis. In addition to lending to 17
capital-intensive energy companies, banks
have also been underwriting bonds and
BANKING INSIGHT + June 2015
advising on mergers. Now, however, the
steep decline in the price of crude has
changed the financial equations for energy
companies, and the stress has started to
spread beyond the energy sector to affect
the financiers as well.
Sabine-Forest is only one of a
Oil financing leaves banks number of oil and gas financing deals
vulnerable from the past few years now causing
In the US, Citi earned USD492 million concern. Energy bonds make up nearly
in revenues from the oil and gas sector Financial Equations 16% of the USD1.3 trillion junk bond
last year, representing 11.8% of its total market, according to Barclays, a number
investment banking revenue, according to
In addition to more than three times higher than it was
Dealogic. For Barclays, the energy sector lending to capital- ten years ago. But investor appetite has
represented 10.7%, followed by JPMorgan intensive energy not kept up with this increase, and analysts
at 6.6%, with numerous other banks also companies, banks have believe banks may still be sitting on up to
similarly exposed. A loan underwritten also been underwriting half of the outstanding financing from the
when oil was priced at USD80 a barrel bonds and advising on past few years.
might have seemed conservative at the mergers. Now, however, “There is a stark parallel with the US
time, but as the price edges down towards the steep decline in property market collapse that heralded
USD40, that same loan starts to become a the price of crude has the start of the 2008 global financial crisis
risky asset. - and upended banks along the way,”
changed the financial
Barclays and Wells Fargo are now feeling financial editor Patrick Jenkins wrote in
equations for energy
the heat on their USD850 million funding the ‘Financial Times’. “Those lenders with
companies, and the
of the merger of US oil groups Sabine and oil exposure stuck on their books may well
Forest, completed last summer. Even back stress has started to be stuck with big losses.” Research from
then, the falling oil price caused problems spread beyond the AllianceBernstein shows that Wells Fargo
with loan syndication, as investors were energy sector to affect and JPMorgan have the highest exposure,
hesitant to buy it due to the volatile pricing the financiers as well. having participated in non-investmentPROSPECTS n fuelling risk
grade loans of USD37 billion and USD31.7 billion respectively, be sufficiently diversified for this to balance out
over the past two years. at least some of the hardship, concluded Dimon;
There is also a more direct parallel to what is happening to the hence, the oil price slide is “not going to be a big
banks as oil prices decline. When weak oil prices caused Texas to deal” for JPMorgan.
fall into recession in 1986, hundreds of banks had to shut down There is, however, one major uncertainty which
their operations in the state. “If you are a small bank in Texas or may throw a spanner in the works for banks hoping
North Dakota, the risk goes well beyond drilling for oil or gas. You to ride out the weakness: no one knows how far oil
funded the mobile homes that workers live in, the doctor’s office prices will fall. Before the oil price started falling in
and other facilities that live off the energy industry,” Dick Bove, June 2014, it had remained consistently above the
banking analyst at Rafferty Capital Markets, told ‘CNN Money’. USD100 mark since the recession; this was the level
“There is no question about the fact that energy is going to be a which Saudi oil minister Ali Al-Naimi considered an
big issue for banks, particularly the ones closely associated with optimum level for balancing the market between
production areas.” producers and consumers.
One factor in the decline in prices is that crude oil
A price blip, or the new normal? production from non-OPEC countries, especially the
While banks with significant exposure to the energy sector are US, has risen significantly in recent years and created
certainly likely to feel some pain as the oil price stays stubbornly a surplus in the market. Supply exceeded demand
low, executives at major banks have been confident that they by 700,000 barrels per day last November, according
are sufficiently diversified to absorb the hit. Jamie Dimon, Chief to Citi, in part because the US was producing 9
Executive Officer, JPMorgan Chase, acknowledged to analysts million barrels per day in 2014, almost double its
in January that the bank would suffer “slight negatives” due to 2008 production. Technological advancements,
its exposure to Texas oil towns. But as the lower oil price is also paired with easy access to bank funding, has made
18 expected to boost consumer spending, JPMorgan Chase should shale oil projects increasingly economically viable in
recent years, creating a boom in exploration. Banks
were keen to lend to explorers because the oil price
BANKING INSIGHT + June 2015
was so stable, creating a situation of oversupply
that now threatens the financial viability of many of
these projects. OPEC, which pumps one-third of the
world’s oil, has historically stepped in to regulate
output in the event of price instability, but so far it
has declined to do so.
Iranian oil minister Bijan Zanganeh did however
indicate to ‘Reuters’ that an intervention may be on
the cards for OPEC’s June meeting, as the weak
pricing is starting to become a problem for the less-
producing countries: “It seems [OPEC’s strategy
of not cutting output] does not work well, because
prices are coming down,” said Zanganeh. “We have
not witnessed stable situations on the market.”
However Saudi Arabia, which as the largest oil
producer is the de-facto leader of OPEC, has so far
resisted suggestions to cut production to shore up
prices.
Nearing the pricing bottom?
Especially shale oil producers, whose operations
are primarily financed with debts, may struggle
to refinance their loans should the weakness
ISSUE continue. On that note, there is one potential upside
in all this for banks: “At times of high commodity
There is no question about the fact price volatility, mergers and acquisitions activity
that energy is going to be a big issue can pick up. This might be a good time for those
for banks, particularly the ones closely with available cash to acquire distressed junior
associated with production areas. players,” said Hassan Bashir, Assistant Manager inPROSPECTS n fuelling risk
the Energy & Resources audit practice situation. We are not in crisis,” said
at Deloitte. This has already started to
But while the overall Najib in a nationally televised address.
happen: Ophir completed its acquisition effect of the weak oil “We are taking pre-emptive measures
of Salamander Energy in March, after price is a negative for following the changes in the external
Repsol acquired Talisman in December. Malaysia, there are global economic landscape which is
Another financial effect of oil prices beyond our control. This is to ensure
staying weak, noted Bashir, is that
some benefits: the that our economy continues to attain a
companies could return to hedge country has been able respectable and reasonable growth.”
accounting, something that has not been to cut its fuel subsidies, The revised Malaysian budget
necessary with prices above USD100 per freeing up funds to assumes crude oil will trade at
barrel: “Especially large [oil producers] approximately USD55 per barrel, a
have continued to pay for price hedging
counteract some of number just below the current USD60
instruments as ‘insurance’ against a the negatives. The level. Analysts at Bank of America
price fall. Lower prices may mean more decades-old subsidy on Merrill Lynch have suggested Malaysia
producing companies, including smaller petrol and diesel was may see its oil-related revenue fall to
ones, could resort to ‘locking down’ 3.1% of GDP in 2015, a significant drop
their output with hedging instruments.”
abandoned in December, from last year’s 5.9%. But while the
But the big question is whether introducing a more overall effect of the weak oil price is a
the current weakness in the oil price flexible fuel pricing negative for Malaysia, there are some
is a temporary situation, or part of system. benefits: the country has been able to
a long-term structural adjustment. cut its fuel subsidies, freeing up funds
Bashir pointed to analyst forecasts that to counteract some of the negatives.
indicated we may see a recovery back The decades-old subsidy on petrol and 19
up to USD80 per barrel by the end of demand for goods and services, falling diesel was abandoned in December,
2017. In April, Barclays analysts said in oil prices should boost GDP growth in introducing a more flexible fuel pricing
BANKING INSIGHT + June 2015
a research note they are hopeful we are emerging Asian countries to 4.7% this system. This has been hailed as a
nearing rock bottom: “We expect the year, up from an estimated 4.3% last “positive step” by Moody’s Investors
support to oil from temporary factors year, according to consultancy Capital Service, due to the link between the
to fade away in [the second quarter], Economics. The overall effect is likely to subsidy and the country’s fiscal deficit.
and that a massive US crude oil stock be a “confidence multiplier” which will While resilient exports will support
build will find its way back to the global trigger to higher-than-expected growth. growth, Bank Negara Malaysia stated
market in the form of products in the According to Glenn Maguire, economist in its annual outlook that economic
months ahead.” Middle East geopolitics at Australia & New Zealand Banking expansion is likely to be supported by
remain an uncertainty factor, added Group, quoted in ‘Bloomberg View’: a number of domestic factors, including
Barclays, but instability would create “We think this will be the defining, sustained expansion of services,
a risk premium which could in turn constructive dynamic that underpins manufacturing and construction. While
support a price recovery. Asian growth in 2015 and most probably a number of central Asian banks have
2016.” cut interest rates to boost growth in
Mixed blessings for Asia But as a major oil-exporting country, the past year, Bank Negara Malaysia
Looking at the region as a whole, the the price weakness is a negative factor has kept interest rates stable in the
fall in crude is generally positive also for for Malaysia, and the same is the case for past six months. Speaking at an ASEAN
Asian countries. Oil accounts for up to fellow oil-exporting ASEAN-members Finance Ministers and Central Bank
18% of total imports in Asia, excluding Myanmar and Brunei. In January, the Governors meeting in March, Bank
Japan, or about 3.4% of total GDP, decline in crude prices meant Malaysia Negara Malaysia Governor Tan Sri Dr.
according to Bank of America Merrill had to cut its annual growth forecast, Zeti Akhtar Aziz said: “Right now, our
Lynch. Similarly to Malaysia, Indonesia now at 4.5% - 5.5% this year, down from interest rates are accommodative, and
has been able to scrap its petrol subsidy a previous estimate of up to 6%. In very supportive of the economy. We
due to the price drop, freeing up cash for addition, the fiscal deficit is expected will review conditions but right now our
a range of economic and administrative to grow to 3.2% of GDP. But Malaysian economy is on a steady growth path and
policies. This has the potential of raising Prime Minister Dato’ Sri Mohd Najib the interest rates support that growth
Indonesia’s GDP to 5.5% this year, up Tun Abdul Razak was quick to downplay trajectory.” Q
from 5.1% last year, according to Fitch concerns that the country is at any risk
Ratings. of economic crisis: “The government n Reporting by the Banking Insight
Coupled with the recovery in global has been vigilantly monitoring the Editorial Team.Prospects Transform
ASEAN Economic Community
(AEC), the union aiming to
“transform ASEAN into a
region with free movement of
Towards
goods, services, investment,
skilled labour, and freer
flow of capital”. Though the
ASEAN financial
region’s convergence will be
long-term, much effort has
been done to pave the way
integration:
towards the end-
goal.
Evolution,
not Revolution
20
Much work remains to be done to promote ASEAN integration, in order
BANKING INSIGHT + June 2015
to realise the ASEAN Economic Community’s vision of a single market which will
catalyse financial development and higher regional economic growth.
or ASEAN citizens, the end of Commitment Affirmed
F
2015 marks the long-awaited As of March 2015, the ASEAN Finance Ministers
deadline for financial integration remained optimistic of making the year-end
of the ASEAN countries deadline, issuing a joint statement with their
through the ASEAN Economic Central Bank Governors: “We remain committed
Community (AEC), the union to achieving the goals of the AEC in 2015. We
aiming to “transform ASEAN into a region with affirmed our commitment to develop plans for
free movement of goods, services, investment, post-2015 ASEAN financial integration that will
skilled labour, and freer flow of capital”. Though be built upon our agreed broad framework.”
the region’s convergence will be long-term, much Greater financial integration will help facilitate
effort has been done to pave the way towards the convergence and strengthen growth as well as
end-goal by the ten member countries making accelerate financial deepening throughout the
up the Association of Southeast Asian Nations region. A critical milestone towards greater
(ASEAN). financial and economic integration is the ASEAN
According to Cedric Chehab, Head of Asia at Banking Integration Framework (ABIF), which
BMI Research, the AEC is “more of an evolution was established by the Central Bank Governors of
rather than a revolution”. But economic growth Malaysia and Indonesia last December. The goal
will continue regardless of whether ASEAN meets of ABIF is to achieve a more integrated banking
its self-imposed deadline. ASEAN’s collective GDP market, while promoting financial development
is expected to see a compound annual growth rate and higher regional economic growth.
of over 10% in the years to come, growing from The financial integration effort on capital
USD2.4 trillion in 2013 to over USD6.2 trillion in markets is overseen by the ASEAN Capital
2023. “It is quite difficult to find other regions with Markets Forum (ACMF), chaired by Datuk
as strong growth prospects as ASEAN.” Ranjit Ajit Singh, who is also Chairman of21
BANKING INSIGHT + June 2015
development at streamlining financial services
Securities Commission Malaysia. The
The goal of ABIF is outline for building a regional market and capital transactions, which will
to achieve a more infrastructure is set out in the ACMF eventually be used by all the ASEAN
Implementation Plan, which contains markets.
integrated banking
three elements: the outline for a so- Unlike the European Union (EU),
market, while
called ASEAN exchange alliance and the AEC will not be pursuing a single
promoting financial governance framework; goals for currency. The region remains too
development and promotion of ASEAN as an asset class; diverse, at least for now. However,
higher regional and the intent for further strengthening during the March ASEAN Finance
economic growth. of the regional bond market. The Ministers’ and Central Bank Governors’
ACMF has already developed several meeting in Kuala Lumpur, Bank
new guiding frameworks aimed Negara Malaysia Governor Tan Sri Dr.You can also read
