Asean Banking Integration Framework

ASEAN:Free Flow of Financial Services
19 June 2015
Wilhelmina C. Mañalac
Managing Director, International Sub-Sector
Bangko Sentral ng Pilipinas
Outline of Presentation
 ASEAN Background
 What, Who and Why?
 The Road to ASEAN Economic Community (AEC)
 ASEAN Economic Integration

 Overview of the AEC
 What, Who, Why, How, When?
 Impact on the Economy: Benefits and Challenges
 ASEAN Financial Integration

 Focus on Banking, Finance and Capital Markets Integration
 Way Forward and Key Messages
2
Focus on Banking , Finance and Way Forward and Key
The ASEAN ASEAN Economic Integration
Capital Market Integration Messages
What is ASEAN?
“A concert of Southeast Asian nations, outward

looking, living in peace, stability and prosperity,
bonded together in partnership in dynamic
development and in a community of caring
societies.”
3
Who is ASEAN?
ASEAN-5
• Indonesia
• Malaysia
• Philippines
• Singapore
• Thailand
BCLMV
• Brunei Darussalam
• Cambodia
• Lao PDR
• Myanmar
• Vietnam
4
Why ASEAN?
“… in an increasingly interdependent world, the cherished

ideals of peace, freedom, social justice and economic well-
being are best attained by fostering good understanding,
good neighborliness and meaningful cooperation among the
countries of the region already bound together by ties of
history and culture …”
Bangkok Declaration of 1967, considered

ASEAN’s Founding Document
5
The Road to the ASEAN Economic Community
From politics to economics...
1977 - ASEAN Preferential Trading Arrangements

1992 - ASEAN Free Trade Area (AFTA)
1997 - ASEAN Vision 2020
“transform the ASEAN into a stable, prosperous and highly competitive
region with equitable economic development and reduced poverty and
socio-economic disputes.”
2003 - ASEAN Community

Three Pillars: ASEAN Economic Community, ASEAN Socio- Cultural
Community and ASEAN Security Community
2007 - ASEAN Economic Community 2015 6

TheEconomy
PH ASEAN ASEAN
AECEconomic Integration
Overview Way Forward and Key Messages
7
(Source: ASEAN Community in Figures 2013) Focus on Banking , Finance and Way Forward and Key
Who will integrate?

TOTAL LAND TOTAL
COUNTRY AREA POPULATION GDP Per Capita Government Language
(sq km) (thousand)
BRUNEI
5,769 400 42,445 Monarchy Malay
DARUSSALAM
Parliamentary/
CAMBODIA 181,035 14,741 978 Khmer
Monarchy
Bahasa
INDONESIA 1,860,360 244,776 3,588 Presidential
Indonesia
LAO PDR 236,800 6,514 1,394 Marxist-Leninist Lao
Federal
MALAYSIA 330,290 29,337 10,338 Bahasa Malaysia
Parliamentary
MYANMAR 676,577 60,976 861 Presidential Burmese
PHILIPPINES 300,000 97,691 2,565 Presidential Filipino/English
English/Malay/
SINGAPORE 716 5,312 52,069 Parliamentary
Mandarin/Tamil
Parliamentary/
THAILAND 513,120 67,912 5,391 Thai
Monarchy
VIETNAM 330,958 88,773 1,596 Marxist-Leninist Vietnamese
ASEAN 4,435,624 616,614 3,748
(Source: ASEAN Community in Figures 2013) 8
When to integrate ? What are the objectives?
ASEAN Community
2015
A Single Market and
Production Base;
A Highly Competitive
ASEAN ASEAN ASEAN Socio- Economic Region;
Security Economic Cultural A Region of Equitable
Community Community Community Economic Development;
and
A Region Fully Integrated
into the Global Economy.
9
ASEAN and the imperatives for integration

ASEAN embodies unity,
collaboration and
cooperation: for mutual
protection, greater positive
impact and growth  Ten member states at varying
levels of economic development
 Combined income (GDP) of
Bigger market of 616 USD2.4 trillion
million people
 Combined land area of
4.4 million sq. km
 5.3% GDP growth by 2015*
An ASEAN community
provides a stronger clout:
10 is better than 1
*Source: IMF Regional Economic Outlook as of April 2014
10
11
Strategic Schedule: Snapshot
12
Regional integration may affect our economy…

BOP
Channels Potential Impact
- Balance-of-payments
- Trade opportunities - Foreign Director
- Services sector Investments
development - Production input and
- Movement of skilled transaction costs
professionals - Quality and prices of
- Potential investments from goods and services
outside and inside the - Foreign exchange
region - Level of reserves
- Greater capital mobility - Contagion risks
13
AEC Implementation Scorecard

Implementation Rate of AEC Scorecard Key Deliverables for 2008-2013
(as of end 2014)
ASEAN Member %
Brunei Darussalam 86.0
Cambodia 86.1
Indonesia 84.0
Lao PDR 84.3
Malaysia 85.5
Myanmar 84.3
Philippines 86.1
Singapore 87.3
Thailand 87.7
Vietnam 87.3
Source: Department of Trade and Industry
14
ASEAN
Financial Integration
Framework
Financial Services Capital Account Capital Market
Liberalization` Liberalization Development
Harmonization of Payments and Settlements System
 end-goal of financial integration;

• Subject to initial conditions and
preconditions; and
• Own milestones and timelines
15
AFIF Goals and Impact to Business
Impact business:
Financial Services • removal of restrictions on
financial services by (2020) • Entry of foreign banks
Liberalization` • presence of qualified ASEAN • Market access of PH banks
banks in ASEAN5 (2018) • Access to new financial
products
Removal or relaxation of Impact on business:

restrictions on capital flows • Relaxed rules on investing in
across the region other ASEAN countries
(2015 to 2020)
Capital Market • Deep, liquid and integrated Impact on business:

capital market
• Linkages of equity exchanges
Development • Building capacity and
• Cross-border equity
infrastructure
transactions
Harmonization of Impact on business:

Harmonization of domestic laws
Payments and and regulations and linkage of • Efficient and convenient
electronic payments for
Settlements System systems (beyond 2015)
businesses
21
Banking Integration
Outcome
Driven
QAB
Progressive and
based on
readiness Reciprocal
Strong and well-managed

bank
Indigenous ASEAN Bank
Inclusive and Comprehensive
transparent Meets the prudential requirements
of the Host Country
22
With R.A. No. 10641, the rules on foreign bank entry are now
further liberalized…
Details RA No. 10641
Mode of Entry  Removes specific limits on the number of foreign banks
and Equity  Re-opens the three (3) modes of entry (i.e., branch, investment in existing
Ownership domestic bank or new banking subsidiary)
 Allows up to 100 percent foreign ownership in an existing bank and a new
banking subsidiary
Qualifications  Removes the qualification to be part of the top 150 foreign banks in the
for foreign world or the top 5 banks in their country of origin as of the date of
banks application
 Provides the following requirements for foreign bank entrants:
(a) established, (b) reputable, (c) financially sound, (d) widely owned and
(e) publicly listed (unless owned and controlled by the government of its
country of origin)
Branching  Allows foreign branches to open up to 5 (instead of 3) sub-branches as
Privileges may be approved by the MB (instead of locations designated by the MB)
 Provides locally incorporated subsidiaries of foreign banks the same
branching privileges as domestic banks of the same category
Limit  Allows foreign banks to hold up to 40% resources/assets of the entire
23
banking system, instead of 30%
New Foreign Banks under R.A. No. 10641
Bank Home Country Date of Approval
Sumitomo Mitsui Banking Corp. Japan 20 February 2015
Shinhan Bank Korea 19 March 2015
Cathay United Bank Taiwan 10 April 2015
Industrial Bank of Korea Korea 30 April 2015
24
With the new law, this is now how
we compare with the neighbors…
Conditions on Foreign Bank Participation in the ASEAN Region
ASEAN Allowed Foreign Other Conditions
Member Equity Participation
Indonesia 99% Entry through foreign bank branches is limited to 11 banks. Foreign
banks must form a JV with local partners.
Malaysia No hard limits Determination of equity will be subject to prudential criteria and
'best interest of Malaysia' criteria.
Philippines 100% 60% of total banking assets must be held by domestic

banks.
Singapore No hard limits The Government will not allow a foreign takeover of its three major
local financial institutions.
Thailand 25-49% Banks must be locally incorporated and established as a limited
>49% case to case public company. Each foreign bank is allowed to establish one branch.
Foreign banks may apply for increased foreign participation up to
49% subject to approval of Finance Ministry. A strong case is required
for application above 49%.
25
Impact of Banking Integration
Risk
 Increase in volatility of capital inflows

into a specific member state
 Additional risks attendant to cross-

border transactions
 Possibility that the domestic banking

market will be dominated by foreign
banks
 Challenges in terms of complexity

and management of regional banks’
operations that can strain
supervisory infrastructures
26
Strategic considerations for banks
Preserving
Expansion of
competitive
operations
advantage
Enhancing risk Banking/

management Financial
Technology
“Right
Compliance
with Introducing
regulations, new products
international
standards
Size” and services
27
Role of BSP: Maintaining the Competitiveness of the
Banking Sector thru responsive regulation
1. PH banking system maintains a 5,000 4,712 12
Total Loan Portfolio (LHS)
sound and stable performance: 4,000 (Php bn)
8
3,000
 Total assets of Php10.4 trillion, by end of 2,000

September 2014 2.1
4
1,000
 Asset quality remains extremely strong with
an NPL ratio of only 2.1% (October 2014) 0
2005 2006 2007 2008 2009 2010 2011 2012 2013Oct-14
0
2. Outlook on PH banking system is

positive:
 Moody’s rated the PH banking system positive

in terms of operating environment; asset
quality and capital; funding and liquidity;
profitability and efficiency; and systemic
support .
Source: BSP website as of Q2 2014 28
3. Capital Adequacy Ratio (CAR) bespeaks of PH banks’ strong
capitalization:
 CAR serves as an equalizer among banks
Indonesia – 19.7% (Aug 2014)
Malaysia - 15.2% (Dec 2014)
Philippines- 16.66% (Jun 2014)
Thailand – 16.67 % (Dec 2014)
Singapore – 11-12.5 % (June

2014)
Source: BSP website as of Q2 2014

29
4. Appropriate safeguards are in place:
 The share of foreign banks in total assets of PH banking system is less than legal
limits
30
What comes next?
 ASEAN will officially declare the establishment of an AEC by

end-December 2015.
For the ASEAN economies and citizens, it will be business as usual –

mainly because the key agreements and regulations that will govern
our business and economic relationships under the AEC are already in
place and operational.
 AEC 2015 will be the beginning of renewed integration efforts.
 ASEAN is now working on Post-2015 Vision.
31
Take away points...
Regional integration including financial/banking integration offers benefits and

opportunities. But there are also challenges that need to be addressed.
There has been significant progress in all areas of financial integration

and the Philippines is on track in its deliverables.
The BSP continues to lead initiatives to ensure that benefits will be

realized and risks are well-managed.
What will happen in December 2015? ASEAN will officially declare the
establishment of the AEC by end-December 2015 and it will be business as
usual because the preparations have been underway.
32
ASEAN: Free Flow of Financial
Services
19 June 2015
Wilhelmina C. Mañalac
Managing Director, International Sub-Sector
Bangko Sentral ng Pilipinas

Asean Banking Integration Framework

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Asean Banking Integration Framework

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ASEAN:Free Flow of Financial Services

 ASEAN Economic Integration

 ASEAN Financial Integration

 Way Forward and Key Messages

“A concert of Southeast Asian nations, outward

“… in an increasingly interdependent world, the cherished

Bangkok Declaration of 1967, considered

The Road to the ASEAN Economic Community

From politics to economics...

1977 - ASEAN Preferential Trading Arrangements

2003 - ASEAN Community

2007 - ASEAN Economic Community 2015 6

Who will integrate?

When to integrate ? What are the objectives?

ASEAN and the imperatives for integration

*Source: IMF Regional Economic Outlook as of April 2014

Strategic Schedule: Snapshot

Regional integration may affect our economy…

AEC Implementation Scorecard

Harmonization of Payments and Settlements System

 end-goal of financial integration;

Removal or relaxation of Impact on business:

Capital Market • Deep, liquid and integrated Impact on business:

Harmonization of Impact on business:

Strong and well-managed

Bank Home Country Date of Approval

Sumitomo Mitsui Banking Corp. Japan 20 February 2015

Shinhan Bank Korea 19 March 2015

Cathay United Bank Taiwan 10 April 2015

Industrial Bank of Korea Korea 30 April 2015

Philippines 100% 60% of total banking assets must be held by domestic

 Increase in volatility of capital inflows

 Additional risks attendant to cross-

 Possibility that the domestic banking

 Challenges in terms of complexity

Enhancing risk Banking/

 Total assets of Php10.4 trillion, by end of 2,000

2. Outlook on PH banking system is

 Moody’s rated the PH banking system positive

Malaysia - 15.2% (Dec 2014)

Philippines- 16.66% (Jun 2014)

Thailand – 16.67 % (Dec 2014)

Singapore – 11-12.5 % (June

Source: BSP website as of Q2 2014

What comes next?

 ASEAN will officially declare the establishment of an AEC by

For the ASEAN economies and citizens, it will be business as usual –

 AEC 2015 will be the beginning of renewed integration efforts.

 ASEAN is now working on Post-2015 Vision.

Take away points...

Regional integration including financial/banking integration offers benefits and

There has been significant progress in all areas of financial integration

The BSP continues to lead initiatives to ensure that benefits will be

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