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September 25, 2009

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Home » Opinion » Foreign Views

Reviving piggy banks, reforming big banks

By Gerard Lyons | September 25, 2009, Friday | Print Edition

HAVING considered some of the lessons from the financial crisis, I will now focus on the implications for banking, globally and here in China.

Let me cite a number of general issues and then focus on some of the key future economic drivers.

The first general issue is the need to avoid financial protectionism.

One of the biggest current challenges is that while politicians and policy makers may often talk in global and regional terms, most are acting nationally.

It is understandable the main focus should be on sorting out problems at home, safeguarding one's own financial system and economy, and where taxpayer's money has been spent, ensuring benefits are seen at home.

Since the middle of last year there has been a contraction in international bank lending, as a number of banks have addressed problems at home and for some there has been pressure to give preference to lending at home.

Yet it is vital to avoid a drift towards financial protectionism or financial nationalism. It would be the equivalent of a lose-lose situation.

The second general issue is the challenge of reducing the role of governments in banking sectors. State capitalism has been a growing issue in recent years, as seen with the focus on sovereign wealth funds. Now, in the advanced economies, one of the unintended consequences of the crisis is the growing role of the state.

One aspect of this crisis is the role the US government played in terms of pressurizing banks to increase lending to the sub-prime sector.

Future drivers

What then are the likely key future economic drivers for banking?

First is a legacy of the crisis, which is now being corrected, a reduction in international bank lending and the scarcity of trade finance. This has been an inevitable consequence of previous crises, as was seen in southeast Asia and Russia in 1997-98, Turkey 2000-01 and Brazil and Argentina during 2000-01.

Capital heads for home as risk aversion is high and the weakening global economy leaves trade being perceived as vulnerable and thus risky.

Second, as we head into a global recovery - a very fragile recovery - the macro-economic policy environment will be particularly important.

There must not be premature policy tightening, in case recovery is halted. But in the future, once recovery is assured, there needs to be counter-cyclical monetary policy, to guard against housing and other asset bubbles. This is particularly important here in China.

Third, banking can play an important role in the future re-balancing of both the world economy and Chinese economy.

A re-balanced world economy has a number of facets: the need for more saving and less debt-fueled spending in the West; the need to limit savings flowing "uphill" from Asia and the Middle East to the West; and the need to encourage more domestically driven growth in China and across Asia and the Middle East.

At this year's annual Asian Development Bank meeting, the president of the ADB argued that for Asia to change its growth model, away from export-led towards domestically driven growth, required three things: the development of a social safety net, providing help to small- and medium-sized enterprises, and the development of Asia's bond markets.

Fourth, the emerging middle class across Asia will demand more from banks. People will want consumer finance and mortgage products.

Clearly this needs to be managed carefully, to avoid the problems of too great a rise in consumer debt and the risk of a housing bubble.

Fifth, the need for more savings and investment products, not only as people save to buy consumer durables, but particularly as a population ages and people want to save for their pension.

Sixth, micro-finance is an important area. I have twice had papers presented to the Commonwealth Finance Ministers Conference on this issue and have witnessed at first hand the enthusiastic response this topic triggers among policy makers.

It plays an important regional role in many countries and in expanding banking services to the so-called "great unbanked" in the population.

(The author is chief economist of global research, Standard Chartered Bank. Shanghai Daily adapted this article from his speech at a forum held by the China Europe International Business School and Caijing Magazine in Shanghai on September 5.)

Foreign Views


 

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