Asian banks, beware the the lessons of Europe

According to the South China Morning Post, the Bank of Tokyo-Mitsubishi UFJ Ltd, the main lending unit of Japan’s biggest bank by market value, moved an estimated $100 billion through the state for government and privately owned entities on the Specially Designated Nationals list.

This list was issued by the US Treasury Department’s Office of Foreign Assets Control between 2002 and 2007, the New York State Department of Financial Services and New York Governor Andrew Cuomo said in a statement recently.

About two weeks earlier, the Monetary Authority of Singapore (MAS) had cracked down on the rigging of the Singapore Interbank Offered Rate, or Sibor. HSBC, Standard Chartered, JP Morgan Chase, Barclays and DBS were among 20 banks at which 133 traders had tried to manipulate the Sibor, swap offered rates and currency benchmarks in the city-state, MAS said in a statement recently.

These incidents within Asian banks are significant, as the European and US banks have been bearing the brunt of criticism.

The major UK banks have been fined for the Libor (the London equivalent of Sibor) rigging and the mis-selling of products.

Due to their role in the churning of derivatives, these banks in the West have been described as greedy, careless and manipulative.

The recent scandals seem to involve only a few Asian banks, but it remains to be seen how many more names will surface and what sort of rules have been flouted. In view of their important role in the economic growth of Asia, they will be closely watched in terms of risk exposure and ethical banking practices.

So, Asian banks, some of which have become very profitable, beware on all fronts. In Europe, recent talks aimed at ensuring shareholders and bond holders bear the brunt of bank failures collapsed after almost 20 hours of discussion.

After investors, the proposals would impose losses on savers with more than 100,000 euros ($130,000) in their account, but France and non-euro zone countries want the ability to tailor the rules.

Discussing possible bank failures may not be the most urgent item on the agenda, although extreme stress testing and estimation of potential bank losses should be conducted. This is tied to the capital position of the bank.

However, there should be a constructive approach to boosting capital buffer and ensuring that the bank does not fail, rather than what to do if it does fail.

It is like pointing a gun at a man’s head even before the crime is committed.

There is said to be a “bond crisis” out there, where the bond bubble is about to burst, with investors looking for other asset classes to invest in. With the impending halt to the US quantitive easing programme of additional liquidity, this search for other asset classes has become more urgent,” said Chris Bowie, manager of Ignis fund management.

“Nevertheless,” he continued, “we see improving US gross domestic product as a positive support to risk assets such as shares, but would expect liquidity reductions to remove some of the froth from current valuations, including in corporate bonds.

“Where we have the biggest concern is some of the riskier banks.

“Even five years on from the financial crisis, we cannot with any confidence say we are happy with the quality of their balance sheets; this is where risks of capital losses are highest.” 

Such is the reality of investing. It involves constant assessment of risk, changes in the markets and valuations.

Micromanagement is usually discouraged but may be useful in this case.