Asian foot-dragging leaves taxpayers on hook for bank bail-outs

An investor watches the electronic board at a stock exchange hall in Huaibei, China.
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An investor watches the electronic board at a stock exchange hall in Huaibei, China.

Asia's financial regulators are dragging their feet on implementing measures to protect taxpayers from big bank failures, leaving governments on the hook for bail-outs and potentially forcing large global lenders to exit some markets.

After Lehman Brothers collapsed in 2008, G20 countries along with Hong Kong, Singapore and Switzerland, pledged to introduce new rules by the end of 2015 that would allow large financial firms to be wound down without triggering a market meltdown.

However, several Asian nations, including China, India and South Korea are making slow progress implementing these reforms, hampering efforts by banks to finalize plans about what they would do if they went bust, according to lawyers working on the issue.

"There is a lot of reluctance in the Asia region to adopt these resolution measures full stop, and even where countries have something in place, it remains to be seen if they will use them," said Stephen Schwartz, senior vice president at Moody's in Hong Kong.

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Asia's slow progress is making it tough for policymakers globally to deliver on a promise to end the "too big to fail" problem - a pledge made by the G20 in the wake of the 2008 crisis to ensure taxpayers should not pick up the bill when lenders collapse.

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The region's move to shore-up its banks after the 1997-1998 Asian financial crisis and relative comfort with state ownership are said to be among the reasons holding Asian policymakers back.

One lawyer working on the plans said there was "bemusement" in the financial industry as to why some Asian regulators hadn't done more.

In Europe and the United States, by contrast, public anger caused by governments spending more than $1.5 trillion to rescue firms like American International Group and Royal Bank of Scotland means regulators have acted quicker to bring in so-called bank "resolution" laws.

Living wills

Central to the post-crisis reform program is a requirement for 39 large financial firms, deemed by regulatory watchdog the Financial Stability Board to be crucial to the global financial system, to draw-up so-called 'living wills' detailing how they could be allowed to die while maintaining critical functions such as ATM payments.

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For these plans to work, however, all countries in which these banks operate must introduce new laws that allow governments to take swift action in the event of a bank failure, such as selling assets or writing down debt.

This means large banks like HSBC, Citigroup and Standard Chartered are reliant on Asian governments to overhaul their insolvency regimes, before they can finalize their living wills.

Hong Kong, where 38 large global financial firms have a presence, is the most advanced in this complex process. Still, it only expects to table legislation introducing resolution powers by the end of next year, the Hong Kong Monetary Authority said in a statement.

India has failed to fully implement even one of nine key requirements drawn-up by the FSB on bank resolution, though the government is drafting some proposals. South Korea and China have yet to fully implement six of the nine requirements.

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The Reserve Bank of India and Bank of Korea did not respond to requests for comment. The China Banking Regulatory Commission could not be reached.

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As a result, some large Western lenders, under pressure in the United States and Europe to complete these plans, may have to move critical parts of their Asia businesses, such as outsourcing hubs in India, to other markets.

"The home regulator could force you to move your operations elsewhere," said Royce Miller, head of Asia financial services at law firm Freshfields Bruckhaus Deringer in Hong Kong.

One area where many Asian jurisdictions are lagging is the power to promptly put into effect resolution instructions from overseas regulators.

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These legal obstacles are beginning to reverberate in New York and Europe, home to many of the large banks.

In August, U.S. regulators slammed 11 banks' living wills as inadequate. A person familiar with the discussions said gaps in the Asia-Pacific plans were partly to blame.

"The plans said 'we'd have no idea what we'd do in this jurisdiction'," said the lawyer working on the plans.

U.S. regulators and several banks contacted for this article declined to comment.

If Asian governments don't speed-up, home regulators may force banks to ring-fence overseas assets inside subsidiaries that are kept separate from the parent company, an expensive strategy.

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In the worst-case-scenario, some Asian countries may become marginalized as home regulators impose strict limits on what banks can do in those markets or require lenders to sell assets altogether.

"The U.S. regulators are saying, if a country doesn't have a workable resolution regime, you shouldn't be doing business there at all," the lawyer said.