Linking Risk and Capital in Asia
If news headlines are anything to go by, we in Asia Pacific are in for a rough ride ahead. A deep Eurozone recession could spell disaster for Singapore. According to Credit Suisse, Singapore's exports to the Eurozone directly account for more than 12 percent of our GDP. Additionally, private sector holdings of Eurozone debt and equities are the highest in the world outside of Hong Kong.
And it’s not just the Eurozone crisis that presents a challenge. For the first time in at least seven years, loan growth in China may fall short of targets. The INSEAD Asia Business Sentiment Survey slid to 69 in June from 74 in March, where respondents cited China worries as dampeners to business confidence. Additionally, a slowdown in the North could spell economic adversity Down Under, as the World Bank warns that Australia’s resource exports could be curtailed by reduced demand from China.
There is some hope yet, given the evolving role of risk managers in Europe. Risk managers are – for the first time essentially – being asked to examine the cost of capital and its returns from a risk perspective, as banks are shaping portfolio strategies to meet increasingly stringent capitalization requirements by the European Banking Authority.
It's a topic that's been discussed by my fellow blogger David Molyneaux, and something I was recently asked to elaborate on by the Singapore Business Times. What we are proposing is a somewhat novel concept: in order to grow, banks must balance both capital management and risk management goals simultaneously.
While APAC lenders don’t yet feel the same economic and regulatory pressures as their European counterparts, we are seeing that the progressive and aggressive banks in the region are just beginning to link risk management to the cost of capital. Even though Asia Pacific banks are well-capitalized overall, the cost of acquiring and maintaining the deposits to fund the capitalization is becoming more expensive. This, in turn, requires risk managers to execute customer decisions that contribute to higher returns on equity, while offsetting the higher costs of capital.
While the links between risk management and capital management aren't yet widespread in APAC, the shift toward integration has begun. It's an approach that will provide real opportunity for banks, particularly as we face the economic challenges ahead.