ASEAN banking accord

Under the new framework agreement, banks within the 10-member Association of Southeast Asian Nations (ASEAN) can sign reciprocal bilateral deals to operate in a partner country on the same terms as domestic financial institutions. Signed by the bloc's finance ministers on Saturday, March 21, the ASEAN Banking Integration Framework or ABIF is aimed at ensuring a more stable flow of funds in the region and increasing cross-border trade and investment.

The landmark banking deal, which is part of ASEAN efforts to create a single economic market, comes ahead of the December 31 launch of the ASEAN Economic Community or AEC. The community is designed to allow a free flow of goods, services and investments, as well as freer flow of capital and skills.

According to a report released by the International Labor Organization (ILO) and the Asian Development Bank (ADB) last August, the single market could add an extra 14 million new jobs and boost the bloc's annual growth by 7.1 percent by 2025. In a DW interview, Rajiv Biswas, Asia-Pacific Chief Economist at the analytics firm IHS, talks about the risks and advantages of this regional banking integration and how it is expected to function.

DW: What lies at the center of the ASEAN Banking Integration Framework?

Rajiv Biswas: In December 2015, ASEAN heads of government are due to implement the ASEAN Economic Community (AEC) agreement which will reduce barriers for trade in services and cross-border investment flows between ASEAN countries. Since financial services are an important element of this upcoming agreement, ASEAN Finance Ministers and Central Bank governors have concluded this deal on the ASEAN Banking Integration Framework, to create a more integrated ASEAN financial services industry.

How is this banking integration expected to work?

The ABIF will create an ASEAN platform that will allow greater cross-border market access for Qualified ASEAN Banks (QABs) to undertake banking operations in other ASEAN countries. A key aim is to allow ASEAN banks to establish operations in other ASEAN countries to support ASEAN corporates that wish to expand their business operations into other ASEAN countries.

The QAB criteria will be agreed bilaterally between ASEAN countries to agree on what standards ASEAN banks will need to meet for reciprocal access to be granted. To that extent, the ASEAN framework is still built upon bilateral reciprocity, rather than a single standard across all ASEAN countries. Since there is no single central bank authority for the whole of ASEAN in the way that the EU has the ECB, it is necessary for national central banks and financial regulatory authorities to agree the standards for QAB status.

What are the advantages and risks of this regional banking integration?

The new ASEAN Banking Integration Framework creates a mechanism for greater regional access for well-capitalized and well-managed ASEAN banks, which will improve their long-term competitiveness and support their expansion across the ASEAN region. This is an important positive step for the long-term growth of ASEAN banking institutions and is expected to improve their competitiveness against foreign banks from other countries.

From a risk management perspective, increased cross-border operations will also require commensurate pan-ASEAN regulatory supervision and regulation for QABs, to prevent cross-border financial contagion effects from a domestic banking crisis in any individual ASEAN country.

How does this deal help the economic integration of the 10-nation group?

Given the importance of financial services for providing key ingredients for economic development such as corporate credit, commercial lending and trade finance, this agreement is an important step forward in achieving a strong outcome when the AEC is implemented in December 2015.

Without such a deal across ASEAN for liberalization of banking services, one of the key components of the AEC agreement would have been missing. Therefore this ASEAN deal on liberalization of trade in banking services is a very positive step forward for the ASEAN economic integration project and will help to create a more substantive AEC accord.

What does ASEAN need to do to achieve economic integration and is the group on the right track to achieve this goal?

ASEAN heads of government have set an ambitious timetable for the AEC, and are seeking a deal on liberalization of trade in financial services and cross-border investment flows amongst ASEAN countries by the end of 2015.

While full ASEAN economic integration by the end of this year may be a bridge too far, nevertheless a substantial AEC first stage deal that delivers the lower-hanging fruit will still be an important step forward for ASEAN economic integration.

It is likely that ASEAN can achieve substantial outcomes by the end of 2015 in terms of liberalization of trade in many key sectors of services, including a deal on ASEAN commercial aviation, creating an ASEAN Open Skies agreement, as well as in financial services. However the area of cross-border liberalization of investment flows is likely to be more problematic and may need to be part of an AEC Stage Two round of negotiations.

Rajiv Biswas is Asia-Pacific Chief Economist at IHS, a global information and analytics firm. He is responsible for coordination of economic analyses and forecasts for the Asia-Pacific region.