How Asia's Banks are Changing

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STRENGTHENING THE SYSTEM

A number of other market forces are driving change in Asian banking.

Consolidation: The pace of mergers and acquisitions has accelerated in recent years and has done much to reduce overbanking. Regulators welcome M&A activity—it’s seen as a way of salvaging weaker players without government intervention. And while consolidation is often viewed as limiting consumer choices, Asia’s consumers stand to benefit in a system that is less fragmented and more effective in the delivery of services. Korea is one market where this trend has been particularly evident: mergers and exits have reduced the number of banks operating in the country to 19, versus 33 one decade ago.

Foreign investment: The growth potential in Asia has attracted American and European institutions. Investment in Asian banks by foreigners has helped boost confidence in those banks. For now, partnerships are the primary vehicle for foreign institutions to participate in the market. Foreign competition is highly constrained. As markets open, however, the presence of foreign competitors should have the effect of driving quality improvement by Asian banks.

Cross-border business: Singapore has a thriving financial services sector, accounting for 11.6% of GDP, and has led the trend towards regional banking. Its largest bank has an international network that extends to China and Hong Kong as well as six other Asian countries. Japan, once a major regional player, has seen its role reduced since the crisis of 1997, while South Korean banks, arguably the most progressive in serving their domestic market, have been slow to develop a regional strategy. Asian countries will need to evolve to a common regulatory framework in order to stimulate more cross-border activity and realize its potential benefits.