The Future of Asian Finance ed. by Ratna Sahay, et al. (review)

In a single reference volume, The Future of Asian Finance compiles the results of the research and policy seminars conducted by the International Monetary Fund (IMF) under its “Future of Asia’s Finance” project from 2013 to 2015. This edited book is comprehensive both in terms of the scope of issues covered — ranging from banking, capital markets, demographic shifts, regional financial centres, regional integration, the evolving global regulatory environment, etc. — as well as the depth of original research analysis of these issues. The IMF’s global perspective affords a certain objectivity in pointing out current weaknesses in Asian financial markets and institutions versus the significant tasks in financing growth in the region.

“Part I: The Structure of Finance in Asia” highlights many similarities shared by Asia’s financial sectors. The book is replete with regional and cross-country quantitative “factoids” which adds to its value as a handy reference work. While Asian countries have led the global economy in terms of growth, many countries face challenges from shifting demographics, weaker external demand for exports, and major infrastructure bottlenecks. The editors take the view that given the tasks of more efficient mobilization of savings, financing investments in human and physical capital, and deepening capital markets, financial sectors in Asian countries will have an important role in facilitating the economic transformation of Asia and become themselves engines for growth.

The study observes that Asia as a whole “has a large financial sector” comparable to other regions, and “considerably larger than their peers outside Asia” (p. 10). However, the evolution of Asian financial sectors must address existing realities and vulnerabilities if they are to continue to support financing the requirements of growth. Banks dominate the financial sectors in emerging Asia. They have generally been well capitalized and relied on traditional deposit taking and loan origination rather than trading and investment banking (Chapter 2). This contributed to the resilience of the Asian financial sectors during the Global Financial Crisis (other factors that enhanced resiliency were the policy measures compelled by the Asian financial crisis to strengthen the regulatory and supervisory framework for corporate governance, penalties for unsafe and unsound banking practices, the early adoption of macro-prudential measures and the shift to more flexible exchange rates (p. 9)). Financial intermediation by banks, however, has relatively higher costs and will face additional constraints due to Basle III capital and liquidity standards (Chapter 11). Bank financial intermediation needs to be augmented by efforts to hasten the further development of capital markets. While capital markets in Asia have achieved notable growth, they have generally lagged behind their counterparts in peer regions. Equity and bond markets “remain underdeveloped and illiquid in part due to the paucity of real money and long-term institutional investors” (p. 9). Stock markets in Asia are an important source of fund raising but are constrained by the idiosyncratic nature of pricing in these markets (pp. 43, 46). The research conducted for the book, using an arbitrage pricing model of market returns, identifies pricing behaviour consistent with “noise trading” and emphasizes the importance of improving securities regulations to enhance investor confidence (p. 44).

The chapter on bond markets explores the promise of bond markets as mobilizing capital for corporate and infrastructure financing (Chapter 4). The regionwide effort in ASEAN to develop domestic bond markets (after the Asian financial crisis as an alternative to bank funding that would be less prone to maturity and currency mismatches and to volatile capital flows) have successfully broadened the base of institutional investors and foreign funds participation, increasing liquidity and reducing costs. Bond markets have also witnessed a qualitative transformation with repeat issuances and diversified supply (p. 60). While there has been progress in establishing bond market microstructures in the region, there continue to be important tasks in the development of bond markets. Liquidity turnover is generally limited and trading is bunched in certain maturities (p. 67), resulting in a lack...