Globalized Banking, Shock Transmission, and Implications on Domestic and International Monetary Policy Stances of the Local Economy Masaru Tanaka Deputy.

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Presentation transcript:

Globalized Banking, Shock Transmission, and Implications on Domestic and International Monetary Policy Stances of the Local Economy Masaru Tanaka Deputy Director-General and Chief of Center for Monetary Cooperation in Asia International Department Bank of Japan SEACEN-CeMCoA/BOJ Directors of Research Seminar Macro-Financial Links and Monetary Policy Management Kuala Lumpur, Malaysia October 27 th, 2009

Globalized Banking, Shock Transmission, and Implications on Domestic and International Monetary Policy Stances of the Local Economy What is globalized banking? What are the roles they play in the local economy? How extended are the globalized banking network in Asia? How do shocks get transmitted? How do they respond to domestic and international monetary policies?

What is globalized banking? Globalized banking expanded by servicing and leveraging on the globalization of the world economy which can be characterized as follows: “A dynamic and multi-dimensional process of economic integration whereby national resources become more and more internationally mobile while national economies become increasingly interdependent.” (OECD, 2005*) “The acceleration in the pace of growth of international trade in goods, services, and financial assets relative to the rate of growth in domestic trade.” (IMF, 2006**) Notes: * OECD, Handbook on Economic Globalization Indicators, June ** IMF, “How Has Globalization Affected Inflation?,” Chapter III, IMF World Economic Outlook, April 2006.

Banking on Trade Openness What is globalized banking? (%) Asia Currency Crisis

Banking on Trade and Financial Openness What is globalized banking? (%) Asia Currency Crisis (%)

Servicing trade and local distribution finance to mainly resident home country clients (B2B) Servicing resident investment capital to home country (B2B) Acting as a non-domestic market player in the domestic financial markets (B2B) Servicing resident home country clients’ remittances to home country (B2C) Servicing resident clients’ home country related banking needs (B2C) Acting as a domestic market player in the domestic and global financial markets (B2B) Servicing resident clients’ general banking needs (B2B, B2C) What are the roles they play in the local economy? As branches As subsidiaries

How extended are the globalized banking network in Asia? Globalized banking network resident operation style 91%9% Note: The data cover Australia, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore and Thailand (96%) (4%)

Globalized banking network head-office origin 76%24% Note: The data cover Australia, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, Singapore and Thailand (67%)(33%) How extended are the globalized banking network in Asia?

Branches/Subsidiaries Breakdown of US, European & Other Banks in Asia & Pacific Region 91%9% Note: The data cover Australia, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, Singapore and Thailand (94%)(6%) How extended are the globalized banking network in Asia?

Branches/Subsidiaries Breakdown of Asian & Pacific Banks in Asia & Pacific Region 90%10% Note: The data cover Australia, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, Singapore and Thailand (100%) (0%) How extended are the globalized banking network in Asia?

Globalized banking network’s resident presence 67%25% Note: The data cover Australia, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore and Thailand 8% （ 1 ～ 67% ）（ 4 ～ 98% ）（ 2 ～ 53% ） (69%)(21%) (10%) How extended are the globalized banking network in Asia?

Globalized banking network’s asset size presence in the banking sector 77.5%13.8% Note: The data cover Australia, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore and Thailand 8.7% （ 5.1 ～ 39.6% ）（ 26.5 ～ 98.1% ）（ 0.3 ～ 30.0% ） (93.5%) (6.2%) (0.3%) How extended are the globalized banking network in Asia?

Globalized banking network’s local asset/GDP presence 121.4% 133.0% Note: The data cover Australia, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore and Thailand （ 5.8 ～ 194.3% ）（ 3.9 ～ 479.6% ） (147.7%) (11.6%) How extended are the globalized banking network in Asia?

Servicing trade and local distribution finance to mainly resident home country clients (B2B) Servicing resident investment capital to home country (B2B) Acting as a non-domestic market player in the domestic financial markets (B2B) Servicing resident home country clients’ remittances to home country (B2C) Servicing resident clients’ home country related banking needs (B2C) Acting as a domestic market player in the domestic and global financial markets (B2B) Servicing resident clients’ general banking needs (B2B, B2C) Through branches Through subsidiaries How do shocks get transmitted?

Global banking networks’ branches and subsidiaries are domestic financial market participants that dominantly supply foreign currency funds in turn for domestic currency assets. When a shock occurs, the global banking networks start unwinding their global asset investments from riskier, easier-to-liquidate order, trying to minimize their risk exposure. Stock market Sovereign debt market Money market Derivatives market Corporate bond market Property market Structured debt market Repo market Foreign exchange market CB Domestic Banks Investment Banks Various Funds Individuals Corporates How do shocks get transmitted? Foreign Banks Interbank B2B

Domestic currency drop suggests either importers heavily buying foreign currencies or huge capital outflow →If excessive, CB can intervene If foreign capital reverses from money or debt markets, CB should inject Detect foreign capital induced asset price crush for future capital inflow Stock market Sovereign debt market Money market Derivatives market Corporate bond market Property market Structured debt market Repo market Foreign exchange market CB Capital outflow Yield Domestic currency Interest rate Domestic capital How do shocks get transmitted?

Domestic currency hike suggests either exporters heavily selling foreign currencies or huge capital inflow →If excessive, CB can intervene If foreign capital is parked in money or debt markets, CB should drain Detect foreign capital induced asset price surge for sudden reversal risk Stock market Sovereign debt market Money market Derivatives market Corporate bond market Property market Structured debt market Repo market Foreign exchange market CB Foreign capital inflow Yield Interest rate Domestic currency Domestic capital How do shocks get transmitted?

Servicing trade and local distribution finance to mainly resident home country clients (B2B) Servicing resident investment capital to home country (B2B) Acting as a non-domestic market player in the domestic financial markets (B2B) Servicing resident home country clients’ remittances to home country (B2C) Servicing resident clients’ home country related banking needs (B2C) Acting as a domestic market player in the domestic and global financial markets (B2B) Servicing resident clients’ general banking needs (B2B, B2C) Through branches Through subsidiaries How do shocks get transmitted?

Global banking networks’ branches and subsidiaries are domestic financial market participants that dominantly supply foreign currency funds in turn for domestic currency assets. When a shock occurs, the global banking networks start unwinding their global asset investments from riskier, easier-to-liquidate order, trying to minimize their risk exposure. Stock market Sovereign debt market Money market Derivatives market Corporate bond market Property market Structured debt market Repo market Foreign exchange market CB Domestic Banks Investment Banks Various Funds Individuals Corporates How do shocks get transmitted? Foreign Banks Interbank B2B B2C

How do they respond to domestic and international monetary policies? Global banking network branches are generally domestic currency borrowers and foreign currency lenders in the interbank, B2B market General tendency of responding vividly to differences (spreads, timing) of domestic and international monetary policies that enhance extra volatilities Coordinated domestic and international monetary policies limit the emergence of differences that can contain extra volatilities to a certain extent

How do they respond to domestic and international monetary policies? Global banking network subsidiaries tend to act more like domestic financial institutions in all the interbank, B2B market and the B2C area General responses to domestic and international monetary policies tend to conform to the local behavior The end.