Dr Ulrich Volz, Associate Professor, SOAS, University of London
10 February 2014 (Monday)
Seminar Room 1, Institute of Southeast Asian Studies, 30 Heng Mui Keng Terrace, Singapore 119614 [see directions
The EU Centre in Singapore and the ASEAN Studies Centre at ISEAS co-organized a research seminar entitled “ASEAN Financial Integration in the Light of Recent European Experiences”on the 10th of February 2014 at the Institute of Southeast Asian Studies.
A copy of Dr Ulrich’s presentation can be found in the “Downloads” section above.
Seminar Report by Dexter Lee (Programme Exec, EU Centre)
In his seminar, Dr Volz gave an overview of Europe’s experiences in financial integration since the 1970s, and drew some lessons that ASEAN can learn from the Eurocrisis.
Monetary and financial integration, he noted, featured prominently in the Asean Economic Community (AEC) blueprint. ASEAN has worked hard to lay the ground for a freer flow of capital as well as an integrated capital market. However, he forewarned that regional financial integration is not smooth sailing – there are merits and of course risks of regional financial integration.
Dr Volz turned to the example of EU financial and monetary integration. Since 1970s Europe has had a strong desire to integrate its financial markets as this was seen to be beneficial to trade integration. Hence, this financial integration was fostered through market deregulation – the EU worked on new banking directives that allowed European banks more opportunities to operate within the EU, the flow of capital was finally liberalised so as to remove all barriers in an internal market, and the monetary union was set up culminating in the launch of the Euro.
The processes and mechanisms of financial integration, Dr Volz argued, has contributed to the current crisis, The adoption of the Euro led to big drop in real interest rates in the periphery countries, and more capital flowed from countries such as Germany and France to these periphery countries such as Greece and Ireland. As such, capital flow bonanzas occurred and were suddenly stopped or reversed when the global financial crisis triggered by the fall of the Lehman Brothers hit Europe. . While the financial markets in the Eurozone were integrated, there was no European financial regulator, and there was no macroeconomic co-ordination at the European level.
What could have been done to prevent the crisis in Europe? Dr Volz opined that stricter regulation of financial markets could have averted the crisis, rather than the “light touch” regulation that was seen in countries such as Ireland and Cyprus. Furthermore, more could have been done to regulate property bubbles. Here, Dr Volz cautioned against the view that these recession-hit countries got themselves in this state because of excessive spending, which was not the case for Ireland or Spain for example. It was poor regulation and lack of European coordination that got many peripheral countries into troubles.
To overcome the current crisis, Dr Volz argued that a pan-European regulatory structure to effectively supervise pan-European banks should be put into place, a crisis resolution mechanism needs to be established, and there should be a reduction in incentives for mispricing risk or moral hazard through the institutionalisation of a sovereign default mechanism within the Eurozone.
In his view, ASEAN can learn from this crisis by asking three questions: how far should capital account liberalisation go, what kind of regional financial architecture is needed to ensure stability in the AEC, and what kind of banking system should ASEAN develop? More financial integration is not always better, , as ASEAN has small economies that may be the biggest losers in capital flow bonanzas, sudden stops and reversal of flows. Hence, capital controls and macroprudential regulation should remain in the policy toolkit to deal with these risks, and capital account liberalisation should be consistent with readiness of economies.
An answer to the second question can be found in the European experience in that a certain level of regional financial integration requires a strong regional supervisory structure. Common supervisory authorities are needed as well – close collaboration of national supervisory authorities does not suffice in this case. ASEAN is still quite far from the level of financial integration that the EU has attained, but there needs to be clarity of the implications of a unified financial market if this is what the ASEAN economies hoped to achieve in the region in the near future.
Lastly, there have been good arguments for the liberalising of cross-border baking services to improve efficiency and reduce costs in ASEAN banking, but there is a danger that too much deregulation will contribute to overly complex banking systems and the emergence of “too big to fail” and “too big to rescue” banking institutions. Indeed, such banks that are too-big-to-fail can become major risks to overall financial stability. In Dr Volz’s opinion, what ASEAN needs is a banking sector that matter for the real economy, where banks can foster real economic activity instead of aiming to be operating internationally.