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2 Rocking the land of
Poppins By Chan Akya
Queues outside banks that stretched for
several streets. Angry depositors who got into
scuffles over queue-jumping by those late to
realize their savings were in trouble. Banks
imposing daily limits on withdrawals and
increasing penalties for breaking fixed deposits.
Rumors on every street corner concerning the next
bank to fail. Central bankers who literally sweat
under the spotlight. Government ministers calling
up the head of the central bank to appear before
an urgent committee where said banker was
reprimanded quite severely. Satirical magazines
that have steered
clear
of their usual beat around politics instead to
make fun of bankers and depositors.
The
above scenes were not from Thailand or Indonesia
in 1997 or South Korea and Russia in 1998. Rather,
it was in the staid old world of the United
Kingdom, where the stiff upper lip apparently gave
way to quivering bouts of sentimentality.
The world of Mary Poppins, scones with
your afternoon tea and warm beer with your chips
appears to exist only for tourist consumption, as
locals go around behaving exactly as the
much-criticized poor people in various emerging
markets do from time to time.
England's
sportsmen have had a bad time in various
international games this week, ranging from rugby
to cricket; perhaps all of them had savings locked
up with Northern Rock, the failing English bank
that was urgently propped up by the Bank of
England barely a week after its governor, Mervyn
King, decried the behavior of the US Federal
Reserve and the European Central Bank for
interrupting the normal functioning of markets by
intervening too frequently.
I wrote in a
recent column [1] about the dysfunctional nature
of Group of Seven (G7) financial systems. Reading
that article again, I am myself astounded by how
"nice" I was in focusing merely on the interbank
system rather than the wider implications for
depositors. When G7 countries start facing good
old-fashioned bank runs, it is the time for every
central banker around the world to stand up and
take notice.
This is especially true for
Asia, which supplies much of the capital that
allows G7 governments to rescue their banks from
time to time. [2] To state the obvious, the region
must not expect similar favors from G7 countries
should local financial systems ever lurch into
disaster mode. Indeed, we should instead expect to
hear the usual homilies about "rigorous market
discipline", "robust checks and balances" and
other such reasons any financial crisis is a
problem for Asians and not something with which G7
countries should help them.
I don't want
to dwell too much on the obvious hypocrisy of G7
countries that helps them to adopt a
holier-than-thou attitude while scrumptiously
helping their own banks avoid troubles. The
50-basis-point cut of the US Federal Reserve this
week falls into the same category.
What
it means for Asia Last year I wrote about
the major financial systems in Asia [3] to
highlight the potential dangers lurking below the
surface in both China and India. The summary of
those observations was that banks had increased
their exposure to low-quality US financial assets
to boost their overall income. Their balance
sheets are stretched by loans to highly risky but
politically connected borrowers in their
respective operating areas. Chinese banks enjoy
substantial liquidity but make poor investment and
loan decisions all too often. While Indian banks
are nominally better managed, their liquidity
constraints are higher.
What helps the two
systems is the substantial increase in the deposit
base over the past 10 years as a natural
consequence of economic growth. This has allowed
banks in the two countries to expand their branch
networks, increase their investment books and
generally adopt more automation (although Indian
trade unions have prevented state-owned banks from
going too far down this route).
This
economic growth allows a number of risky borrowers
to avoid defaults, as their business environment
remains robust, thereby keeping them honest - that
is, it costs them more to default than
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