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



ASEAN Economic Integration




Overview of the AEC
What, Who, Why, How, When?
Impact on the Economy: Benefits and Challenges
ASEAN Financial Integration


What, Who and Why?
The Road to ASEAN Economic Community (AEC)
Focus on Banking, Finance and Capital Markets Integration
Way Forward and Key Messages
2
The ASEAN
ASEAN Economic Integration
Focus on Banking , Finance and
Capital Market Integration
Way Forward and Key
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
The ASEAN
ASEAN Economic Integration
Focus on Banking , Finance and
Capital Market Integration
Way Forward and Key
Messages
Who is ASEAN?
ASEAN-5
• Indonesia
• Malaysia
• Philippines
• Singapore
• Thailand
BCLMV
• Brunei Darussalam
• Cambodia
• Lao PDR
• Myanmar
• Vietnam
4
The ASEAN
ASEAN Economic Integration
Focus on Banking , Finance and
Capital Market Integration
Way Forward and Key
Messages
Why ASEAN?
“… in an increasingly interdependent world, the cherished
ideals of peace, freedom, social justice and economic wellbeing 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,
ASEAN’s Founding Document
considered
5
The ASEAN
ASEAN Economic Integration
Focus on Banking , Finance and
Capital Market Integration
Way Forward and Key
Messages
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 SocioCommunity and ASEAN Security Community
2007 - ASEAN Economic Community 2015
Cultural
6
TheEconomy
ASEAN
PH
ASEAN
Economic
Integration
AEC
Overview
Focus on Banking , Finance and
Way Forward and Key
Way
Forward
and
Key
Messages
Capital Market Integration
Messages
7
(Source: ASEAN Community in Figures 2013)
The ASEAN
ASEAN Economic Integration
Focus on Banking , Finance and
Capital Market Integration
Way Forward and Key
Messages
Who will integrate?
TOTAL LAND
AREA
(sq km)
TOTAL
POPULATION
(thousand)
GDP Per Capita
Government
Language
5,769
400
42,445
Monarchy
Malay
CAMBODIA
181,035
14,741
978
Parliamentary/
Monarchy
Khmer
INDONESIA
1,860,360
244,776
3,588
Presidential
LAO PDR
236,800
6,514
1,394
MALAYSIA
330,290
29,337
10,338
MYANMAR
676,577
60,976
861
Marxist-Leninist
Federal
Parliamentary
Presidential
PHILIPPINES
300,000
97,691
2,565
Presidential
SINGAPORE
716
5,312
52,069
Parliamentary
THAILAND
513,120
67,912
5,391
VIETNAM
330,958
88,773
1,596
4,435,624
616,614
3,748
COUNTRY
BRUNEI
DARUSSALAM
ASEAN
(Source: ASEAN Community in Figures 2013)
Parliamentary/
Monarchy
Marxist-Leninist
Bahasa
Indonesia
Lao
Bahasa Malaysia
Burmese
Filipino/English
English/Malay/
Mandarin/Tamil
Thai
Vietnamese
8
The ASEAN
ASEAN Economic Integration
Focus on Banking , Finance and
Capital Market Integration
Way Forward and Key
Messages
When to integrate ? What are the objectives?
ASEAN Community
2015
ASEAN
Security
Community
ASEAN
Economic
Community
ASEAN SocioCultural
Community
A Single Market and
Production Base;
A Highly Competitive
Economic Region;
A Region of Equitable
Economic Development;
and
A Region Fully Integrated
into the Global Economy.
9
The ASEAN
ASEAN Economic Integration
Focus on Banking , Finance and
Capital Market Integration
Way Forward and Key
Messages
ASEAN and the imperatives for integration
ASEAN embodies unity,
collaboration and
cooperation: for mutual
protection, greater positive
impact and growth


Bigger market of 616
million people


Ten member states at varying
levels of economic development
Combined income (GDP) of
USD2.4 trillion
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
The ASEAN
ASEAN Economic Integration
Focus on Banking , Finance and
Capital Market Integration
Way Forward and Key
Messages
11
The ASEAN
ASEAN Economic Integration
Focus on Banking , Finance and
Capital Market Integration
Way Forward and Key
Messages
Strategic Schedule: Snapshot
12
The ASEAN
ASEAN Economic Integration
Focus on Banking , Finance and
Capital Market Integration
Way Forward and Key
Messages
Regional integration may affect our economy…
BOP
Channels
- Trade opportunities
- Services sector
development
- Movement of skilled
professionals
- Potential investments from
outside and inside the
region
- Greater capital mobility
Potential Impact
- Balance-of-payments
- Foreign Director
Investments
- Production input and
transaction costs
- Quality and prices of
goods and services
- Foreign exchange
- Level of reserves
- Contagion risks
13
The ASEAN
ASEAN Economic Integration
Focus on Banking , Finance and
Capital Market Integration
Way Forward and Key
Messages
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
Liberalization`
Capital Account
Liberalization
Capital Market
Development
Harmonization of Payments and Settlements System
 end-goal of financial integration;
• Subject
to initial
conditions
preconditions; and
• Own milestones and timelines
and
15
AFIF Goals and Impact to Business
Financial Services
Liberalization`
•
•
removal of restrictions on
financial services by (2020)
presence of qualified ASEAN
banks in ASEAN5 (2018)
Removal or relaxation of
restrictions on capital flows
across the region
(2015 to 2020)
Capital Market
Development
Harmonization of
Payments and
Settlements System
•
•
Deep, liquid and integrated
capital market
Building capacity and
infrastructure
Impact business:
•
•
•
•
Entry of foreign banks
Market access of PH banks
Access to new financial
products
Impact on business:
Relaxed rules on investing in
other ASEAN countries
Impact on business:
•
•
Linkages of equity exchanges
Cross-border equity
transactions
Impact on business:
Harmonization of domestic laws
and regulations and linkage of
systems (beyond 2015)
•
Efficient and convenient
electronic payments for
businesses
21
Banking Integration
Outcome
Driven
Progressive and
based on
readiness
QAB
Reciprocal
Strong and well-managed
bank
Indigenous ASEAN Bank
Inclusive and
transparent
Comprehensive
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
and Equity
Ownership
 Removes specific limits on the number of foreign banks
 Re-opens the three (3) modes of entry (i.e., branch, investment in existing
domestic bank or new banking subsidiary)
 Allows up to 100 percent foreign ownership in an existing bank and a new
banking subsidiary
Qualifications
for foreign
banks
 Removes the qualification to be part of the top 150 foreign banks in the
world or the top 5 banks in their country of origin as of the date of
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
Privileges
 Allows foreign branches to open up to 5 (instead of 3) sub-branches as
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
Member
Allowed Foreign
Equity Participation
Indonesia
99%
Malaysia
No hard limits
Philippines
100%
Singapore
No hard limits
Thailand
25-49%
>49% case to case
Other Conditions
Entry through foreign bank branches is limited to 11 banks. Foreign
banks must form a JV with local partners.
Determination of equity will be subject to prudential criteria and
'best interest of Malaysia' criteria.
60% of total banking assets must be held by domestic
banks.
The Government will not allow a foreign takeover of its three major
local financial institutions.
Banks must be locally incorporated and established as a limited
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 crossborder 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
Expansion of
operations
Preserving
competitive
advantage
Banking/
Financial
Technology
Enhancing risk
management
Compliance
with
regulations,
international
standards
“Right
Size”
Introducing
new products
and services
27
Role of BSP: Maintaining the Competitiveness of the
Banking Sector thru responsive regulation
1. PH banking system maintains a
sound and stable performance:
4,712 12
5,000
4,000
Total Loan Portfolio (LHS)
(Php bn)
8
3,000


Total assets of Php10.4 trillion, by end of
September 2014
Asset quality remains extremely strong with
an NPL ratio of only 2.1% (October 2014)
2,000
2.1
1,000
0
0
2005 2006 2007 2008 2009 2010 2011 2012 2013Oct-14
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
4
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
The ASEAN
ASEAN Economic Integration
Focus on Banking , Finance and
Capital Market Integration
Way Forward and Key
Messages
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
The ASEAN
ASEAN Economic Integration
Focus on Banking , Finance and
Capital Market Integration
Way Forward and Key
Messages
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