COMMENTARY: TO CLEAN UP THE MESS, CLEAN UP THE CULTURE (int'l edition)
The primitive financial systems that serve much of Asia worked admirably for decades. But growth and protected markets masked growing credit problems in the region's banks. Now, these problems are coming to the fore. So are bankers and regulators rushing to fix things? Hardly. They're still clinging to the outdated notion that growth will solve all their problems.
It won't, nor will government bailouts. What banks need is more disclosure, better accountability to shareholders, and less meddling by government bureaucrats. Bankers, politicians, and regulators need to launch reforms before another global economic downturn makes their job doubly difficult.
GOOD MANAGERS. From Japan to Thailand, many banks lack credit and cost controls that their counterparts in the U.S. and Europe have used for years. As a result, banks have lent too much money to property developers, who are struggling with overbuilding and falling asset values nearly everywhere.
Regulators must help shareholders throw out bad managements and install good ones. They also must insist banks come clean about loan losses and other vital data so the market can judge the state of a lender's health. And bankers need to be less responsive to bureaucrats beholden to governments.
As their overseers at the Ministry of Finance looked on benignly, Japanese banks financed one of the wildest real-estate bubbles in history during the 1980s. They're still paying for their excesses. South Korean bankers that gave out loans to the bankrupt Hanbo Group were thinking more about pleasing their political patrons than stockholders. Their bill is just coming due.
Unless bankers' allegiances are to shareholders, no one will make hard decisions to ensure profitability. But regulation needs some teeth. It must encourage competition and experimentation while protecting the basic soundness of the financial system.
Who should pay for repairs? Banks and shareholders should foot much of the bill. Large depositors chasing high yields shouldn't expect to be repaid in full if lenders go broke. There may even be forced mergers.
Asia has one huge advantage other regions lack: high savings rates and sound fiscal policies. To overcome their problems, Asian banks have to change their corporate cultures and put risk control and profitability ahead of rank expansionism. That's not impossible. While Indonesian state-run banks wallow in debt, many privately owned lenders enjoy returns on equity of 20% or more. Even Japan and Korea have some finance groups that know how to manage risk. Bankers should catch on to that example--and fast.
By Mark L. Clifford
Updated June 15, 1997 by bwwebmaster
Copyright 1997, Bloomberg L.P.