ASEAN Avert Global Trend: McKinsey say Global finance is shrinking, hurting global growth prospect

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McKinsey, the top global advising group, is conducting a series on Global Finance.

In its first release to the public, of its finding, McKinsey said, quote:

“Global finance is shrinking, hurting growth prospect globally.”

While McKingsey research is drawing data from globally, yet arguably, mostly from the data is from the Eurozone and the USA. In other parts of the globe, there are talks of increasing the level of “Cross Border Finances” or in McKinsey’s words, “Global Finance.”

A few years back, ASEAN central banks met, to which they endorsed the ASEAN Financial Integration Framework in 2011.

“ASEAN is in the final stages to launch the framework for banking sector integration, said Bank Negara Malaysia Governor Tan Sri Dr Zeti Akhtar Aziz.

The ASEAN Financial Integration Framework will pave the way for a more meaningful presence of qualifying ASEAN banks within the region, while promoting regional financial stability.

“Recognising the diversity of ASEAN economies and the varying stages of financial sector development, the framework allows flexibility for ASEAN countries to participate in the integration process based on their readiness and willingness,” said Dr Zeti Akhtar Aziz, in her keynote address at the 19th ASEAN Banking Conference, adding  greater flexibilities will also be given to facilitate the regional expansion plans of qualifying ASEAN banks to become important conduits of financial intermediation in the region.

Under the framework, qualifying ASEAN banks with the capacity and were well-managed will serve as the regional standard bearers, and will be accorded more flexible access into regional markets.

And Asian financial institutions are recovering, from the global crisis.

IDC says, quote: “Asian banks first to return to normal growth rates among global banks.”

IDC Financial Insights:

Singapore and Hong Kong – 28 February, 2013 – Asian IT leaders can now think about “new” things in banking as regional banks become the first to go back to normal growth rates among global financial institutions.

“Asia/Pacific banks are returning to normal rates of growth in terms of revenues and profits,” says Michael Araneta, director for IDC Financial Insights Asia/Pacific.

Araneta expects that the industry in the region will see rare occasions of extraordinary gains and declines in revenues in 2013. Profit growth for the region’s largest banks converged to 20% in 2012 over 2011, and will converge to approximately 15% in 2013 — similar to rates of growth in pre-crisis years. Meanwhile, revenue and profit growth in the world’s leading banks has not normalized, and the swings in profitability continue to be wild among the largest non-Asian banks in the world.

“While the previous years saw banks report super-growth especially in terms of profits, we will see less of that trend in 2012. However, going back to normal is not a bad thing, especially if you are moving on from a crisis.”

He notes that the region’s banks are also going back to pre-crisis growth levels for IT spending.

Araneta expects IT spending in Asian banks to grow 8.8% in 2013 over 2012. This figure is an improvement from the approximately 7% growth the industry saw in the previous year, and the 6.5% the year before that.

“I believe that this speaks of banks’ improving confidence in the financial conditions in the region and in the rest of the world. This also points to the theme of ‘going back to normal’ because this 8.8% brings us back to pre-crisis rates of growth.”

A major area of spending will be on core banking modernizations. Araneta explains that as a group, Asia/Pacific banks are assumed to compare favorably versus their peers in the United States and Europe with respect to the age of core banking systems currently in use.

In the “old world,” truly modern core systems are rare. In Asia/Pacific, meanwhile, there have been many references of banks leapfrogging technologies and investing in new generation core systems, not to mention how several newly emerged institutions have built up altogether sophisticated core banking platforms.

The Following is from McKinsey:

Financial globalization: Retreat or reset?

March 2013 | by Susan Lund, Toos Daruvala, Richard Dobbs, Philipp Härle, Ju-Hon Kwek, and Ricardo Falcón

For three decades, the globalization of finance appeared to be an unstoppable trend: as the world economy became more tightly integrated, new technology and access to new markets propelled cross-border capital flows to unprecedented heights. But the financial crisis brought that era of rapid growth to a halt.

Drawing on our proprietary database of financial assets in 183 countries, Financial globalization: Retreat or reset? continues the McKinsey Global Institute’s ongoing series of reports on global capital markets. More than four and a half years after the financial crisis began, we find that recovery has barely started, despite a rebound in some major equity indexes. Growth in financial assets has stalled, while cross-border capital flows remain more than 60 percent below their 2007 peak. Some of the shifts under way represent a healthy correction of the excesses of the bubble years—but continued retrenchment could damage long-term economic growth.

Among the report’s findings:

Global financial assets—or the value of equity-market capitalization, corporate and government bonds, and loans—have grown by just 1.9 percent annually since the crisis, down from average annual growth of 7.9 percent from 1990 to 2007 (Exhibit 1). This slowdown is not confined to deleveraging advanced economies; surprisingly, it also extends to emerging markets.

Several unsustainable trends—most notably the growing size and leverage of the financial sector itself—propelled much of the financial deepening that occurred before the crisis. Financing for households and corporations accounted for just over one-fourth of the rise in global financial depth from 1995 to 2007—an astonishingly small share, since providing credit to these sectors is the fundamental purpose of finance.

Cross-border capital flows have collapsed, falling from $11.8 trillion in 2007 to an estimated $4.6 trillion in 2012 (Exhibit 2). Western Europe accounts for some 70 percent of this drop, as the continent’s financial integration has gone into reverse. Eurozone banks have reduced cross-border lending and other claims by $3.7 trillion since 2007, and central banks now account for more than 50 percent of capital flows within the region.

Even beyond Europe, global banking is in flux. Cross-border lending has fallen from $5.6 trillion in 2007 to an estimated $1.7 trillion in 2012. In light of new capital and regulatory requirements, many banks are winnowing down the geographies in which they operate. Commercial banks have sold more than $722 billion in assets and operations since the start of 2007; foreign operations make up almost half of this total. Expanding the debt and equity capital markets will take on greater urgency as banks scale back their activities.

Emerging markets weathered the financial crisis well, but their financial-market development has stalled since 2008. As of 2012, their financial depth is on average less than half that of advanced economies (157 percent of GDP, compared with 408 percent of GDP), and this gap is no longer closing. Capital flows involving emerging markets, however, have largely rebounded. We estimate that in 2012, some $1.5 trillion in foreign capital flowed into emerging markets—32 percent of global capital flows that year, up from just 5 percent in 2000—surpassing the precrisis peak in many regions. Capital flows out of developing countries rose to $1.8 trillion in 2012. Although most outflows are destined for advanced economies, $1.9 trillion in “South–South” investment assets are located in other developing countries.

With the pullback in cross-border lending, foreign direct investment from the world’s multinational companies and sovereign investors has increased to roughly 40 percent of global capital flows. This may bring greater stability, since foreign direct investment has proved to be the least volatile type of capital flow, despite a drop in 2012.

With global financial markets at an inflection point, the report outlines two starkly different future scenarios. One path leads to a balkanized structure that relies more heavily on domestic capital formation. While this outcome may reduce the risk of another financial crisis, it may provide too little financing for long-term investment. A second scenario, envisioning a more sustainable approach to financial-market development and global integration, avoids the excesses of the past but supports robust economic growth.

The steps that policy makers take next will help determine whether nations turn inward or a new and more sustainable phase in the history of financial globalization begins. Completing the global regulatory-reform initiatives currently under way will be crucial, along with building more robust capital markets, creating new financing mechanisms for borrowers that lack access to the market, and removing restrictions that limit the most stable forms of cross-border investment.

Whatever the policy outcome, banks and investors will have to make fundamental shifts in strategy, organization, and geographic footprints. Nonfinancial corporations, too, may find it difficult to access capital in some parts of the world if the global financial system remains stalled. Corporations themselves, however, may play a larger role as providers of capital, particularly to their own supply chains. If this development leads to an increase in foreign direct investment, it may have a stabilizing influence on cross-border capital flows.

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