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Workshops on EME banking systems and regional financial integration

Committee on the Global
Financial System
CGFS Papers
No 51a
Workshops on EME banking
systems and regional
financial integration
Summary of follow-up workshops organised by the
Committee on the Global Financial System
The workshops were chaired by Chia Der Jiun,
Monetary Authority of Singapore and Fernando Restoy,
Bank of Spain
December 2014
JEL Classification: F36, G15, G2
This publication is available on the BIS website (
Bank for International Settlements 2014. All rights reserved. Brief excerpts may be
reproduced or translated provided the source is stated.
ISBN 978-92-9131-997-8 (online)
December 2014
Summary: follow-up workshops on EME banking
systems and regional financial integration
Monetary Authority of Singapore (MAS), Singapore, 4 August 2014 and
Bank of Spain, Madrid, 24 October 20141
1. Background
The two workshops, organised jointly with SEACEN and CEMLA, at the Monetary
Authority of Singapore and the Bank of Spain, respectively, brought together public
and private sector participants to discuss financial integration trends, with a
particular focus on regional emerging market banking systems. The aim was to
disseminate and discuss the key messages in the March 2014 CGFS report on “EME
banking systems and regional financial integration”,2 and to gain additional
information on more recent developments in the Asia-Pacific and Latin American
regions as well as on any related issues not covered in the report.
Both workshops followed identical formats, consisting of three sessions each. In
the first, participants shared their views on whether and how regional integration
would continue, identifying important drivers as well as the main constraints. The
second session focused on the business models of regional banks, on how these
compare to those of their competitors, and on the market implications of financial
integration. The third session considered key messages and policy implications.
Discussions that occurred in the first two sessions are summarised immediately
below. These are then followed by the key messages and policy implications.
2. Summary of discussion
2.1 Trends and drivers
One of the main takeaways from the two workshops was that private sector
participants in both regions expect cross-border activity to continue to expand, but
at a slower rate than anticipated in the recent CGFS report. Regional financial
integration among emerging market economies has generally been increasing, with
the process of expansion having sped up since the global financial crisis, albeit with
The workshops were chaired by Chia Der Jiun (Monetary Authority of Singapore) and Fernando Restoy
(Bank of Spain), respectively.
See CGFS, “EME banking systems and regional financial integration”, CGFS Papers, no 51, March 2014,; see the Appendix for an executive summary.
considerable differences across regions and jurisdictions (Graphs 1A and 1B).3 Trade
flows and related corporate banking activities were mentioned as the most
important drivers of regional integration, reflecting different variants of a “followyour-client” strategy. In Asia-Pacific, cross-border banking in the frontier markets, in
particular, has tended to be rather supply chain-oriented, particularly towards
manufacturing goods. As supply chains evolve more quickly than in the past,
geographically and otherwise, one approach taken by regional banks in Asia-Pacific
was to target foreign firms along the supply chain of their current customers, thus
making interactions between these firms easier. An example mentioned in this
context was Pakistan, where Chinese banks were expanding in order to support
Chinese multinational corporations. Trade finance and other forms of transaction
banking were thus considered more important for financial integration in AsiaPacific than, for example, funding for mergers and acquisitions.
Bank credit to emerging Asia-Pacific
Graph 1A
International claims on the region1
Share in international claims on the region
USD bn
Per cent
02 03 04 05 06 07 08 09 10 11 12 13 14
Intraregional banks
AU & JP banks
US banks
UK banks
Swiss banks
Euro area banks
Other reporting banks
Intraregional banks
AU & JP banks
US banks
UK banks
Swiss banks
Euro area banks
Sum of all cross-border claims and locally extended claims in foreign currency. 2 Intraregional share is the sum of international claims
on the emerging Asia-Pacific region of banks headquartered in Chinese Taipei, Hong Kong SAR, India, Singapore and the offices of banks
located in the region that have a parent institution from a non-BIS reporting country (assuming these are headquartered in Asia).
Source: BIS consolidated banking statistics (immediate borrower basis).
In the Latin American region, regionally active banks tend to follow a somewhat
different variant of the “follow-your-client” strategy, which is more explicitly
targeted at supporting the international activities of large corporates from banks’
BIS consolidated banking statistics cover reporting banks’ worldwide consolidated claims, which
include: cross-border claims from banks’ home jurisdictions and local claims by their subsidiaries
and branches within a particular country (in both foreign and local currencies). International claims
are defined as cross-border claims and local claims in foreign currency and, hence, do not include
local claims in local currency. In the graphs, the latter type of claim is excluded in order to compare
the share of claims of BIS-reporting banks to those of non-reporting banks operating in reporting
countries, for which data on local claims in local currency are not available. This is particularly
relevant for Asia-Pacific because of the growing activity of Chinese banks operating from Hong
Kong SAR. A substantial share of foreign bank claims in Latin America and the Caribbean, in
contrast, comprises their subsidiaries’ local claims in local currencies. Therefore, these estimated
shares should be treated as a lower bound, providing only partial insight into EME financial
integration trends. For data including local claims in local currencies, see Annex 2 of CGFS (2014).
home jurisdictions. Therefore, much of intraregional bank expansion, both in the
Southern Cone as well as in Central American countries, has tended to reflect
corporate banking activities. Against this background, trade was cited as an
important driver in the Latin American region as well. However, with only about a
quarter of trade flows being intraregional, compared to about half in Asia, the pace
of accompanying financial integration among Latin American economies has been
slower. The integration process has also been more concentrated, with Brazilian and
Colombian banks being among the most regionally active institutions, given the
rising regional presence of large corporates from both countries.
Among the other important drivers mentioned at both workshops was
macroeconomic and institutional convergence, with a broad trend towards better
institutions, more predictable policies and independent central banking facilitating
banks’ cross-border expansion. In Latin America, in particular, workshop participants
highlighted that South-South macroeconomic integration continued to be on the
rise, as illustrated by FDI flow patterns, and that this would tend to support financial
integration. In addition, participants at both workshops mentioned the (temporary,
in some cases) retrenchment of advanced economy banks from non-core EME
locations and business lines as a key catalyst for the most recent round of
intraregional bank expansion. Saturation of domestic markets and various “soft”
factors (such as geographical and cultural proximity) were also highlighted as
additional determinants of regional expansion.
Bank credit to Latin America and the Caribbean
International claims on the region1
Graph 1B
Share in international claims on the region
USD bn
Per cent
Intraregional banks
US banks
UK banks
Other reporting banks
Swiss banks
Other euro area banks
Spanish banks
Intraregional banks
US banks
UK banks
Swiss banks
Other euro area banks
Spanish banks
Sum of all cross-border claims and locally extended claims in foreign currency. 2 Intraregional share is the sum of international claims
on the emerging Latin America and Caribbean region of regional banks (Brazil, Chile and Mexico) and Caribbean offshore banks (Panama)
divided by total international claims on the emerging Latin America and Caribbean region.
Source: BIS consolidated banking statistics (immediate borrower basis).
Constraints on further regionalisation. Private sector participants at both
workshops stressed that achieving meaningful growth in foreign markets can be
very challenging. One of the reasons why participants thought regional integration
would likely be slower, and more selective on a country-by-country basis, than
anticipated in the CGFS report was the risk of uneven regulatory implementation
and associated unlevel playing fields across countries. For example, many market
practitioners voiced concern that the combination of Basel III with national
subsidiarisation and ring-fencing requirements could constrain cross-border
expansion by impeding efficient allocation of capital and liquidity among banks’
foreign affiliates. At the same time, views differed across regions on how
pronounced such effects are likely to be. At the Madrid workshop, for example,
some participants felt that regulatory frameworks in Latin America and the
Caribbean were more homogenous than those in other regions.
Views also differed on the cost-benefit trade-offs of subsidiarisation (see also
Section 2.2 below). While participants at the Madrid workshop highlighted the
financial stability benefits that subsidiarisation has brought to Latin America
(recalling also the experiences of Spanish banks), the participants of the Singapore
workshop were more focused on the associated costs and inefficiencies. They
argued, for example, that subsidiarisation is capital-intensive and that ring-fencing
requirements could end up trapping liquidity in specific markets or jurisdictions. In
response to such concerns, several supervisors from the Asia-Pacific region noted
that their respective jurisdictions had been reviewing local regulations with a view to
making adjustments (eg by lifting limits on the number of foreign bank branches),
while retaining some regulatory flexibility depending on a specific bank’s business
model and long-term intentions. This highlighted the importance of finding the
right balance between prudential objectives and banks’ interests in an efficient
allocation of funds.
Another difference across workshops was that participants from the Latin
American region seemed more focused on headwinds from local competition when
setting up foreign subsidiaries. Outside the smaller frontier markets, growing
foreign businesses organically, for example by setting up retail banking operations
and attracting deposits, was described as extremely difficult. Therefore, the typical
mode of regional expansion was to first rely on corporate and, in some cases,
investment banking activities, and to otherwise look for acquisition opportunities to
expand through M&A at a later stage. This was the model that the Colombian banks
had followed during their recent expansion in Central America.
Finally, workshop participants listed a number of more structural constraints.
These include the differences between regional economies (including tax regimes)
combined with constraints on the ability of banks to attract or develop staff with the
necessary country-specific expertise to keep pace with foreign expansion. The same
applies to existing risk management and governance frameworks. Similarly, as
highlighted in the CGFS report, underdevelopment of local capital markets, currency
volatility and the associated lack of deep hedging markets were cited as key
challenges to the regional financial integration process.
Securities markets. One finding in the CGFS report is that the degree of
intraregional investment in debt and equity securities varies greatly by region. While
residents of the Asia-Pacific region have noticeably increased their intraregional
investment in debt and equity securities over recent years, regional diversification
by Latin American residents has not kept pace (Graph 2). These trends were broadly
confirmed by workshop participants, who also pointed to initiatives such as
Mercado Integrado Latinoamericano (MILA), which seeks to integrate stock markets
in Chile, Colombia and Peru, as illustrating the incipient integration of capital
markets in the region. As such, they may also have supported the recent expansion
of Brazilian investment banks into Chile, Colombia, Mexico and Peru.
Despite these positive signs, participants at both workshops emphasised the
pronounced home bias of regional investors and the special role of the US dollar in
EME currency and debt management as some of the main obstacles to greater
integration in regional securities markets. For one, currency risk, combined with
shallow hedging markets, limits the willingness of regional investors to participate in
local currency bond markets. To the extent that they want to diversify, US dollar
bonds (and instruments denominated in other major currencies) are the preferred
option. The shorter maturity of local currency bonds was also cited as a factor
limiting institutional investor appetite for these instruments. Investors, therefore,
tend to be tempted into the major benchmark indices and international bonds
issued by larger borrowers, without any particular geographical orientation. The
differences between regional markets and the lack of country-specific expertise (see
above) add to this behaviour.
Selected indicators of regional debt and equity investments
Selected EMEs: foreign ownership of
local government securities
As a percentage of total
Total debt securities investment from
EMEs to other countries in own
Total equity securities investment
from EMEs to other countries in own
As a percentage of total investment
As a percentage of total investment
05 06 07 08 09 10 11 12 13 14
Graph 2
EM Asia EM
Europe America Middle
East &
EM Asia
America Middle
East &
Excluding investments to offshore centres within own region.
Sources: IMF, Coordinated Portfolio Investment Survey; CEIC; EMED; national authorities.
On the borrower side, US dollar debt issuance has been particularly attractive
recently, due to the funding advantage over domestic markets. The share of US
dollar borrowing has been particularly high in Latin America, where an additional
incentive comes from matching the dollar receipts of major commodity exporters in
the region. Much of Latin American US dollar debt is booked offshore in the
Cayman Islands and other Caribbean jurisdictions. US dollar debt issuance has also
been increasingly important for borrowers from smaller frontier markets in Asia;
these would often issue via regional financial centres such as Hong Kong SAR and
2.2 Business models and market implications
Workshop participants agreed that bank business models (ie foreign subsidiaries
versus branches, local funding versus international funding, and diversification
across lines of business or across countries) can have strong implications for
financial integration.
The CGFS report highlights that regional EME banks appear to exhibit higher
capital buffers and a stronger focus on local deposit funding than their advanced
economy peers (with the possible exception of Spanish banks in Latin America,
which are run as independent units, with a strong base of local retail deposits). This
is consistent with the input from representatives of EME banks, who noted that their
institutions expanded primarily via foreign subsidiaries, implying a business model
based on the autonomy of each affiliate’s capital and liquidity management. On this
basis, banks’ expansion often takes place via acquisitions of existing local entities
(M&A), which grants them access to local sources of funding, including retail
deposits. The subsidiary model has been particularly prevalent among LatinAmerican banks, which tend to operate from a strong retail base. In contrast, in the
Asia-Pacific region, where both the business lines of regional EME banks and local
regulatory requirements tend to be more diverse, modes of operation appear to
vary more as well, with both the branch-based and subsidiary models being
pursued, where feasible.
Funding models. According to the private sector participants, the global
financial crisis and resulting regulatory response have caused banks to rethink their
funding models and return-on-equity (ROE) targets. One aspect of this
development is a renewed focus on more traditional approaches to funding with an
emphasis on a stable local deposit base (see above). The competitive nature of
deposit markets in many countries, combined with regulatory constraints and ROE
considerations, in turn, means that regional banks have become much more
selective in terms of their target markets.
Participants also discussed their reliance on non-deposit funding, including
debt issuance. Workshop participants from the Latin American region, where banks’
international debt issuance has been particularly strong since the crisis, pointed out
that debt funding was driven by both structural and cyclical factors. The cost
advantage over domestic markets and robust demand by foreign investors were
cited as some of the most important factors. Market access, in turn, was apparently
aided by the subsidiary mode of expansion used in the region, which helped shield
banks from the market risk premiums imposed on their head offices during crisis
periods. For example, despite the credit rating downgrades of Spanish banking
groups, their local affiliates in the region broadly maintained their credit quality and
continued to issue debt throughout the euro area crisis. On the demand side,
investor interest seemingly remained strongest for US dollar debt, given that key
institutional investors in Latin American debt are either headquartered in the United
States or cater to US clients.
Market implications. Overall, participants noted that regional integration had
generated tangible benefits that should support further steps towards integration
by both the private and public sectors, including in those countries currently
lagging behind. Despite possible concerns over capital and liquidity allocation
across countries, such as in the Asia-Pacific region, there was a sense that
specialised financial services are more widely accessible and risks tend to be better
diversified as a result of regional integration trends. Foreign bank expertise in areas
such as debt placement, in turn, was seen as supporting efforts at market
deepening. Cross-border banking was also noted as having generally spurred
domestic competition, allowing banks to achieve greater scale. Outside the frontier
economies, however, technology at local banks (with the possible exception of retail
payments automation) was seen as largely up to date, limiting the potential for
further technological spillovers.
A challenge for the industry is how to strengthen corporate structures to meet
regulatory requirements and how to aggregate risk management-related data at
the group level. Private sector participants suggested that, even if local entities are
fully subsidiarised, more attention may have to be given to risk management
control at the group level rather than for each jurisdiction. They also expressed
concern about the way regulation is being implemented across jurisdictions,
highlighting the role that unlevel playing fields (eg those arising from regulations
that favour domestic banks) could play in hindering further integration. As an
alternative to ring-fencing, some suggested improved risk management and
regulatory cooperation as well as closer dialogue between banks and regulators.
3. Key takeaways
At both workshops, discussions (excluding the private sector participants) of key
takeaways and policy implications focused primarily on the way forward for
sustainable and high-quality regional financial integration. The key messages
relevant for policy were as follows:
Speed and scope of integration. Public sector participants at both workshops
felt that the discussions had generally confirmed the trends and related
challenges highlighted in the original CGFS report. However, they also agreed
that the speed of further regionalisation may be slower than previously
anticipated. In addition, globalising supply chains and differences between
countries within regions may mean that regionalisation will be increasingly
overlaid with a more general trend towards internationalisation.
Risk management guidance. While more gradual integration will tend to
provide policymakers and market participants additional time to adjust, both
supervisors and banks need to prepare to address the resulting challenges,
especially in frontier markets. In particular, risk management guidance should
be high on the list of priorities, including monitoring balance sheet capacity
and foreign currency funding. Risk management frameworks need to account
for international shocks and linkages between banking systems.
Market development. Policymakers in the Asia-Pacific region continue to
focus on developing local financial infrastructure and deeper markets. In line
with the CGFS report, measures to deepen hedging markets were suggested as
a major step towards further financial market integration. In addition, it was
noted that a well developed pension system can serve as a key catalyst for
market development (as highlighted by the Australian example) by channelling
long-term funds to both banks and non-financial corporates. In the case of
frontier markets, there could also be scope to focus on joint capital markets
instead of trying to build fully developed markets in each jurisdiction. These
views were largely shared by policymakers from the Latin American region. One
difference, however, was that capital market integration had apparently been a
slower process in Latin America, with Chilean pension funds cited as one of the
few examples of major institutional investors venturing outside their own
jurisdiction in a meaningful way. Still, initiatives such as Mercado Integrado
Latinoamericano (MILA) were cited as examples of how market integration
could be accelerated within the region.
Regulatory cooperation. Much of the remaining discussion among
policymakers concerned regulatory and supervisory cooperation. There was a
sense that, overall, the emerging framework for multilateral cooperation
appeared to be working, even though the modalities continue to differ across
jurisdictions. Among the constraints are asymmetries in regulatory powers
between country authorities, which can drive a wedge between the ability and
willingness to cooperate. In terms of channels of cooperation, supervisory
colleges remain the instrument of choice for agreeing suitable metrics, sharing
information and discussing policy options. However, participants also
highlighted that the bigger, global supervisory colleges often lack sufficient
focus on regional issues and that certain types of sensitive information are
difficult to share in a college context. As a result, deepened bilateral relations
among supervisors as well as memoranda of understanding (MoUs) were seen
as important complements of the college-based approach to cooperation.
Dialogue with banks. One way to support the trend towards regional
integration is for regulators to try to balance their prudential objectives with
efficient allocation of funds. Dialogue between banks and their regulators is an
important tool in this context. Banks have already noted a significant increase
in time spent communicating with regulators. Such dialogue can also help to
demonstrate a bank’s commitment to a country, and help regulators familiarise
themselves with the intentions of financial institutions within their respective
Appendix: Executive summary of the CGFS report
Regional emerging market economy (EME) financial integration is on the rise. There
are signs that banking groups headquartered in EMEs (EME banks) have stepped up
their expansion activity, which is expected to raise their importance in regional
financial systems. While this has the potential to affect the global financial system in
a variety of ways, the still small overall footprint of these banking groups suggests
that current trends are unlikely to have significantly changed the risk profile of EME
banking systems at this stage. Yet, broader effects are possible over time and may
warrant policy responses in a number of areas. Specific findings include:
Progressive growth in international claims on EMEs. Various indicators
suggest that EME banking sector internationalisation is increasing. For example,
aggregate cross-border claims (which include loans, deposits, debt securities and
other financial instruments) on economies in the three major EME regions have
increased almost threefold in the past decade. Although cross-border claims dipped
sharply in 2008, they have since surpassed pre-crisis levels.
Growing international role of EME banks in the post-crisis period, with a
strong regional orientation. The international expansion of EME banks has gained
momentum since the 2008–09 financial crisis. This is evident in all EME regions, but
has gained particular traction in Southeast Asia, Central America, and the
Commonwealth of Independent States. EME bank participation in syndicated
lending markets has also grown in recent years, offsetting in part retrenchment by
euro area institutions. Expansion strategies demonstrate a strong regional
orientation, with cross-border merger and acquisition activity among EME banks, for
example, predominantly taking place within the same region.
Heterogeneity in the scale and mode of banks’ cross-border expansion.
There is considerable heterogeneity at the institutional and country level regarding
the degree of EME bank international activity, and strategies for market penetration
in other EMEs. In aggregate, EME bank foreign presence remains small relative to
parent bank balance sheets and host country financial systems. Yet, there are
notable exceptions, particularly in Southeast Asia, where EME banks facing more
saturated banking markets have dedicated larger shares of their balance sheets to
overseas lending. Expansion strategies also vary, with some banks pursuing largely
organic expansions and others preferring strategic acquisitions. To some extent, this
may be driven by underlying business models, with retail banking-focused
operations favouring subsidiaries, and more centrally funded business lines tending
to favour branches. In some countries, regulatory developments have also been a
factor driving foreign banks to establish subsidiaries.
Drivers of current bank expansion are similar to past experience, but
within a more competitive environment. Many of the drivers of current bank
expansion in EME regions, such as reduced opportunities at home and pursuit of
domestic clients, are similar to the drivers of past expansions into EMEs.
In the past, increased foreign bank participation benefited from extensive
financial sector liberalisation, often in the wake of EME financial crises. Today, the
conditions in many EME banking systems have changed significantly, with tighter
regulatory environments and more competitive domestic banking sectors. On this
basis, EME banks may be better positioned to capture significant market share in
smaller frontier economies, where divestments or more limited activities by other
financial institutions create opportunities for new players.
Relatively traditional, but evolving, business models. While the business
models of regionally expanding EME banks differ by region, ownership structure,
and size of foreign operations, key metrics suggest a greater focus on retail banking
and deposit funding activities than many of their advanced economy peers. Higher
capitalisation ratios of EME banks, in turn, suggest scope for further cross-border
expansion, implying that internationalisation trends may continue to be fairly
sizeable at least for individual countries.
At the same time, the evolution of balance sheet metrics for EME bank foreign
affiliates points to rising convergence with longer-established advanced economy
peers. This is particularly true for larger, more systemically important EME bank
affiliates, which increasingly resemble their similar-sized, more regionally focused
advanced economy peers – likely due to recent acquisitions as well as post-crisis
adjustments to business and funding models. These developments suggest that
banks’ risk profiles are likely to further converge with time, as foreign affiliates of
EME banks become increasingly active. Indeed, EME foreign affiliates have engaged
in relatively aggressive new lending in EME markets since 2009. And, while much of
this new activity is backed by deposit funding, there appear to be pockets of
relatively greater reliance on interbank and market financing.
Costs and benefits. Many of the trade-offs currently faced by EMEs resemble,
although in a new guise, the earlier experience of financial integration of EMEs with
advanced economies. Potential benefits, such as allocative efficiency, better
availability of specialised financial services (eg trade and project finance), market
deepening and regional risk-sharing, will have to be traded off against potential
costs. The flip side of diversification benefits, for example, is greater potential for
spillovers at the institutional and system levels, particularly for EMEs where foreign
bank operations account for a relatively large share of host system assets. This, in
turn, raises new challenges in terms of the complexity and management of regional
banks’ operations, and can strain existing market and supervisory infrastructures.
Policy implications. For policymakers, these findings imply scope for action in
two broad areas: (i) improving regulatory environments and market infrastructures,
and (ii) crisis prevention and resolution. In the former area, constraints on the ability
of banks to better hedge their balance sheet risks can be eased by stepping up
efforts to improve local market infrastructure (eg further developing local markets
for bonds and related hedging instruments), while formulating explicit supervisory
guidance to help improve banks’ risk management and stress testing frameworks
(eg incorporating regional shocks into stress test scenarios). In addition, supervisors
may need to enhance their efforts to monitor and address balance sheet
mismatches, such as those arising from foreign currency funding, while balancing
the costs and benefits of any associated regulatory measures (eg subsidiarisation or
constraints on certain types of funding).
In the area of crisis prevention and resolution, in turn, steps can be taken to
better address spillovers as well as strengthen existing safety nets. In both cases,
regional efforts have a particular role to play, building on established frameworks,
such as supervisory colleges or regional forums. This can be particularly challenging
in countries where supervisors and other authorities are relatively tightly resourced
or have limited experience with cross-border issues. As regards safety nets, despite
their overall relatively small size, regional financial arrangements, when sufficiently
developed, offer a number of possible advantages in terms of the provision of
confidence-enhancing effects and in helping to address idiosyncratic and regional
shocks – provided that effective conditionality arrangements can be put in place.
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