Shadow Banking System in ASEAN

Dr. Yong PAN

Professor

Institute of Sino-ASEAN Research ,

Guangxi University

Email Address:p110w108j@163.com

The Defination of Shadow Banking

What is Shadow Banking?

Shadow Banking's Four Standards

Features of Shadow Banking

Shadow Banking in ASEAN

Causes for Shadow Banking's appearence

in ASEAN

Main patterns of Shadow Banking in

ASEAN

Shadow Banking's development in ASEAN

The Defination of Shadow Banking

The shadow banking

system is the collection of

non-bank financial

intermediaries that

provide services similar

to traditional commercial

banks.

Shadow Banking's Four Standards

Although there are still a few disputes about the

defination and scope of Shadow Banking,here we list

our own four standards to give a description of

shadow banking talked below.

A、institution standard

B、business standard

C、risk standard

D、regulation standard

Institution standard

Primarily,shadow banking must be those

institution which are standing out of the

banking system.(Like insurance company、security company、fund company etc)

Business standard

The Business that Shadow Banking involves

belongs to be credit intermediary.Different from

traditional banks,Shadow Bank usually absorbs

capital by debts solely.

Risk standard

The business provided by Shadow Banks

can not effectively isolate the rigid

redemption risk business from the

providers of funds, which differs a lot from

banking system

Regulation standard

Shadow banking is free from financial

regulation, namely they are not affected

by or almost not affected by financial

regulation

Shadow Banking in ASEAN

Causes for Shadow Banking's appearence in ASEAN

Tightening of monetary policy

Affected by financial crisis，most governments of ASEAN

countries took several tightening of monetary policies ,thus the

profit space for banks has suffered a short decrease recent years.

Changes of discount rate and base interest rate in Vietnam which is not beneficial

totraditional banks.(http://www.sbv.gov.vn/portal/faces/vi/vim/vipages_trangchu)

Causes for Shadow Banking's appearence in ASEAN

To absorb social idle funds

Inflation rate is much higher than bank interest rate, making

the real interest rate be negative actually.The purchasing

power of currency in most ASEAN countries gradually

reduces, which turns investors and capital owners to the

shadow banking system for a better yield, such as non-bank

financial institutions or private finance.

The inflation rate in Vietnam 2011 is 18.1%,and the rates for

2010 and 2011 are respectively as high as 8.9% and 8.9%,

which means there have existed negative real interest rates.

In Thailand and Malaysia, their political interest rate was kept

at about 3% , however, the inflation rates have reached 3.8%

and 3.8% respectively.That is to say the demand for gains of

social idle capital still can not be met.

Main patterns of Shadow Banking in ASEAN

Vietnam

The financial market is regulated by The State Bank of Vietnam,which

includes 5 State-owned credit institutions(Joint Stock Commercial Bank for

Foreign Trade of Vietnam、Vietnam Bank for Industry and Trade、Bank for

Investment and Development ofVietnam、Vietnam Bank for Agriculture and

Rural Development and Housing Bank ofMekong Delta)、34 Joint-stock

commercial banks、6 financial companies and 10 leasing companies.

Two main patterns of Shadow Banking are:

financial company and leasing company

No Name of companies Charter capital

No Name of companies Charter capital

1 Vietnam Textile and Garment Finance Joint stock Company

VND500 billion

10 PPF Vietnam Finance Company Limited. VND500 billion

2 Rubber Finance Company VND1,588,970,707,414

11 Song Da Finance Joint Stock Company VND686 billion

3 Post and Telecommunication Finance Company Limited

VND 500 billion

12 Cement Finance Joint Stock Company VND604.9 billion VND

4 Vietnam Shipbuilding Finance Company Limited.

VND 1,623 billion

13 EVN Finance Joint Stock Company. VND2,500 billion

5 Petro Vietnam Finance Joint stock Corporation

VND 6,000 billion

14 Toyota Việt NamToyota Financial Services Vietnam Company Limited

VND500 billion

6 Handico Finance Joint Stock Company.

VND 550 billion

15 Vinaconex-Viettel Finance Joint Stock Company

VND1,000 billion

7 Prudential Vietnam Finance Company Limited

VND 615 billion

16 Vietnam Chemical Finance Joint Stock Company

VND600 billion

8 Mineral and Coal Finance Company Limited.

VND1,000 billion

17 JACCS International Vietnam Finance Company Limited

VND500 billion

9 Sociéte General Viet Finance Company Limited.

VND550 billion

18 Miare Asset Finance Company (Vietnam) Limited

VND500 billion

Financial Company in Vietnam and its Charter capital

No Name of leasing company Chapter

capital No Name of leasing company

Chapter

capital

1 BIDV Finance Leasing Company VND447

billion 7

Vietnam International

Leasing Company Limited

VND350

billion

2 VCB Leasing Company Limited. VND 500

billion 8

Kexim Vietnam Leasing

Company

USD 13

million

3 Industrial and Commercial Bank of

Vietnam LeasingCompany Limited

VND800

billion 9

Sacombank Leasing

Limited Company

VND 300

billion

4 Agribank no.1 Leasing Company. VND200

billion 10

Chailease International

Leasing Company Limited.

VND 200

billion

5 Agribank no.2 Leasing Company VND350

billion 11

Asia Commercial Bank

Leasing Company Limited

VND200

billion

6 ANZ/V-TRAC Leasing Company VND103

billion 12

VINASHIN Finance

Leasing Company Limited

VND200

billion

Leasing Company in Vietnam and its Charter capital

Thailand

Main patterns of Shadow Banking in ASEAN

Except the central bank（Bank of Thailand），there are 14

Thailand Commercial Banks、one retail bank、2 financial

companies、22 Assets Management Companies 、8 Specialized

Financial Institutions and 27 Personal Loan Companies.

Main patterns of Shadow Banking in Thailand are:

Financial company、Assets Management Company

and Personal Loan Company.

Examples:

Advance Finance PCL is a leading financial services firm offering innovative

and creative solutions to a niche and diversified client base that includes

governments, financial institutions, corporations, SMEs, and high-net-worth

individuals.

Its core business includes：

Funding services

Raising fund from public and institutes in form of “Certificate of Deposit”

(CD) with the full protection of deposit and interest by Deposit Protection

Agency Act B.E. 2551

Lending services

Offering Corporate and Personal Loans in various products

Structured Finance

Providing the services of Financial Advisor, Equity / Debt arranging,

Syndication loans, Debt restructuring and Merger & Acquisition (M&A).

Main patterns of Shadow Banking in ASEAN

Malaysia

In Malaysia, shadow banking is defined as a ‘system of credit

intermediation that involves entities and activities outside BNM’s

regulatory capture.

Based on this definition, the Malaysian shadow banking system

comprises non-bank entities that engage in (i) loan origination, (ii)

purchase of debt securities, (iii) securitisation, (iv) credit guarantee or

enhancement exercises and (v) credit rating or scoring activities，

which account for approximately 93% of GDP.

Assets of Banks and NBFIs in Malaysia

You can see that the share of NBFIs almost keeps at a stable level of

about 27.5%

Table indicates the size of NBFIs in Malaysia in

comparison with the banking institutions. The data used

to measure the size of these entities were obtained

through the annual Sources and Uses of Funds survey

undertaken by BNM, which has been the central bank’s

approach in monitoring NBFIs since the early 1990s.

The market share of assets held by NBFIs has shown

gradual increment in the past decade, with 27% of total

assets in the financial system in 2000, rising to 28% in

2010. Unit trust funds recorded the highest growth at

14.8% in the observed period, indicating an increase in

wealth accumulation activities by the household sector.

The gradual growth of the Malaysian shadow banking system reflects the increase in the complementary role assumed by NBFIs in deepening the Malaysian financial system. On the other hand, banks’ assets market share remains above 50% every year, reflecting the position of the banking institutions as the backbone of the Malaysian financial system. In addition, credit intermediated by banks accounted for 61% of total credit intermediated in 2011 while the remaining was dispersed among various NBFIs.

Credit Intermediation by non-banks in Malaysia

Main patterns of Shadow Banking in ASEAN

Singapore

Singapore enjoys a very advanced financial system and plays

as the financial center of ASEAN.Shadow Banking in

Singapore mainly includes 24 Merchant Banks 、3 Financial

Companies、37 Advising on Corporate Finance、26 Real

Estate Investment Trust Managements etc.

The forms below shows all types of

financial institutions in Singapore

Type of Institution Number

Type of Institution Number

Type of Institution Numb

er

Commercial Banks 122 Holders of Financial Adviser's Licence 61 Finance Companies 3

Financial Holding Companies

5 Registered Fund Management Companies 124 Money Brokers 9

Merchant Banks 42 Exempt Financial Advisers 317 Singapore Government Securities Market - Primary Dealers

13

Representative Offices of Banks

37 Persons exempted from the requirement to hold a Capital Markets Services licence under Section

116 Singapore Government Securities Market - Secondary Dealers

20

Institutions with Asian Currency Units

160 Exempt Financial Advisers - Companies providing financial advisory services to not more than 30 accredited investors

120 Approved Holding Companies 3

Money Changers 384 Exempt Fund Managers - Companies providing fund management services to not more than 30 qualified investors

272 Approved Exchanges 3

Remittances 76 Exempt Corporate Finance Advisers - Companies advising on corporate finance to only accredited investors

101 Designated Clearing Houses 3

Holders of Capital Markets Services Licence

322 Holders of Trust Business Licence 51 Recognised Market Operators 25

Lloyd's Asia Scheme 25 Exempt Persons Carrying on Trust Business

37 Insurance Brokers Licensed To Place Business With Lloyd's

6

Representative Offices of Insurers and Reinsurers

2 Registered Insurers 161 Exempt Insurance Brokers Carrying on Business as Direct Insurance Brokers

24

Insurance Brokers 70 Authorised Reinsurers 6 Other Relevant Organisations 16

Shadow Banking's development in ASEAN

The number and scale of shadow banking

institution is increasing at a quick rate.

Type of non-bank financial institutions in Singapore is the

most abundant among ASEAN. The development of the

shadow banking is also advanced.

But, compared to Singapore, the shadow banking pattern

of the countries like Vietnam with relatively low levels of

financial development are not diversified.

Surveillance framework for shadow banking in Malaysia

The diversity of Shadow Banking in ASEAN

Circle 1 contains entities that raise potential systemic risk

concerns through their high level of interconnectedness with

the banking system, which includes, inter alia, banks’ funding

exposures to the shadow banking entities, deposit placement

with banks and ownership of financial institutions, apart from

maturity and liquidity transformation activities.

Circle 2 encompasses entities that are involved in

the extension of credit, either directly or as part of

the credit intermediation chain. Most NBFIs are

grouped in this circle, making it an integral part of

the monitoring framework.

Circle 3 encompasses entities that do not fall under

the shadow banking definition yet facilitate the flow

of capital between end-supplier and end-user of

funds, which is part of the financial intermediation

chain at large.

Thailand

Assets of non-bank financial companies

The scale of Shadow Banking in ASEAN

From the change of non-bank assets, we can

simply see that the assets of non-bank financial

intermediaries is decreasing in all, and this is

closely related to the intensive financial

supervision in Thailand.

Malaysia

Non-bank credit intermediaries in Malaysia are generally

not reliant on complex market-based funding to undertake

maturity or liquidity transformation. This reduces the

susceptibility of non-bank credit intermediaries in Malaysia

to a sudden market liquidity shock or liquidity

dislocations. The small share of debt securities issued by

non-bank credit intermediaries as a

proportion of total outstanding debt securities further limits

any impact of stress faced by these

intermediaries on overall market liquidity.

While the Malaysian bond market has grown in size and depth

over the years, reliance on debt securities by non-bank credit

intermediaries to fund credit activities remains relatively in low.

For the larger non-bank credit intermediaries, the majority of

the credit activities are funded from member contributions

whilst for the remaining, the main source of funding is

internally-generated funds. The private debt securities issued

by non-bank credit intermediaries amounted to RM29.6 billion

or 3.5% of outstanding debt securities as at end-2011. Of the

debt securities issued by the non-bank credit intermediaries,

commercial paper accounted for 2.2%, amounting to RM651

million or 11.2% of total commercial paper outstanding. While a

small number of non-bank entities have relied on commercial

paper, any potential impact on credit intermediation to financial

stability arising from any decline in market liquidity is limited,

given the small scale of their activities as well as size of

standing facilities and credit lines from banks. The exposure of

non-bank credit intermediaries to maturity mismatches is also

limited, with an average maturity tenure of private debt

securities issued of 8.2 years, whilst the financing granted by

these entities, which formed the majority of assets, is largely for

the medium-term not exceeding nine years.

Direct financial interlinkages between non-bank credit intermediaries and the

banking system primarily take the form of deposit placements with banks and

counterparty risk exposures. Such counterparty risk exposures arise from banks’

lending to, or holdings of debt securities issued by, the non-bank credit

intermediaries. On an aggregate basis, deposit placements by non-bank credit

intermediaries accounted for approximately 10% of total banking system deposits

as at end-2011. Provident and pension funds, insurers and takaful operators,

and a few large unit trust funds account for the bulk of these deposits

(69.7%),with the balance dispersed among other small non-bank financial entities.

The placement of deposits by the provident and pension funds, insurers and

takaful operators, and unit trust funds are spread out across a number of banking

institutions, hence, minimising the risk of funding concentration at the individual

bank level. While lending to and holdings of debt securities issued by non-bank

credit intermediaries by the banking institutions have expanded over the years,

such credit risk exposures remain small, accounting for only 2.9% of total

outstanding loans and debt securities held by the banking system or 21% of the

capital base of the banking system. Given the relatively small size of non-bank

credit intermediation in the financial system, interlinkages among these

intermediaries are also limited.

Singapore

Singapore is one of the most important financial center in the world

and is the highest level of financial development in ASEAN . So, we

will study the development of shadow banking in Singapore from the

perspective of the world.

Share of assets of non-bank financial intermediaries

From the above chart ,although the share of non-

bank intermediaries in Singapore to world

remained 1%, the statue of Singapore is equal to

some large economy entities like China,

Australia, Canada, this is enough to illustrate

that the development level of shadow banking in

Singapore is very advanced.

Before the financial crisis, the growth rate of

shadow bank in Singapore is very

high(18%),while after the financial crisis, the

growth rate declined significantly(4%-5%)

Share of total assets

From the above chart , in the total assets of Singapore, bank accounted

for 60%, non-bank financial intermediaries accounted for20%-30%,the

central bank accounted for 10% and insurance companies and pension

funds accounted for 5%. Therefore, we can conclude that non-bank

financial intermediaries in Singapore has developed rapidly.

Our Prospections for Shadow Banking In ASEAN

Monitoring challenges

1、Data limitation remains the biggest challenge faced by

financial stability authorities in their surveillance of the

shadow banking system.

2、Another key challenges faced is lack of granular and

quality information for risk assessment.

3、Finding the common financial soundness indicators

for shadow banking entities and activities is still placed

on our future research.