My daytime job sees me analyze economies and financial institutions in the Asia Pacific region for the Asian Development Bank. In trying to keep things separate and focus on my academic persona here, I have usually not written much about this on the blog.
However, while teaching some development economics and political economy classes at TUJ during my time in Japan, I always found the work to be very relevant. I also started developing a “development finance” course for undergrads, which I would like to take up once again when teaching becomes an option.
South Asia ex India is probably the region I have looked at most consistently over the years, the countries being Bangladesh, Nepal, Pakistan and Sri Lanka. The program I work on, the Trade and Supply Chain Finance Program, provides loans and guarantees to partner banks to support trade.
The regular stuff, country and bank analyses, is complemented by the occasional in-depth research dive, which counts among the favorite aspects of the job. Time permitting during my stint here down under, I would like to spin some of these insights out into (semi-)academic paper(s).
Stuff I have written about includes such illustrious topics as countercyclical capital buffers, trade finance during sovereign distress, as well as loan moratoria during COVID-19. These are all very timely topics of course, and as far as I know, I am the only one writing about them with a cross-country perspective in this part of the world.
While I don’t want to start commenting on the ins and outs of these countries’ financial sectors on this blog, I might occasionally post the abstracts of the research I am involved in here for my records. Here are the ones so far covered, the topics in bold. Reach out if you want to learn more.
- The countercyclical capital buffer (CCyB) is one of the key new regulatory tools introduced with the Basel III framework conceived after the Global Financial Crisis (GFC). The CCyB is an additional capital layer requirement, typically set between 0-2.5% of risk-weighted assets (RWA) —in line with the Basel Committee of Banking Supervision (BCBS) guidance— and consisting of high-quality common equity tier 1 (CET1) capital. It is one of several macroprudential rules intended to address systemic risk in financial sectors, i.e. to curb unsustainable loan growth during boom periods and avoid excessive balance sheet contraction during crises. Most advanced economies including all members of the Eurozone1 have CCyB regimes in place. Some prominent emerging markets with such legislation are Brazil, Mexico, Russia, Saudi Arabia and Turkey. Among TFP countries, eight have a CCyB regime in place, i.e. Armenia, Bangladesh, Bhutan, Cambodia, Georgia, Indonesia, Nepal and Sri Lanka. According to Bank of International Settlements (BIS) guidelines, several of them should have by now “activated” this regime by raising the buffer from its current setting of zero, in particular Cambodia and to a lesser extent Georgia and Sri Lanka. Nepal is the only TFP country that has announced a hike in its CCyB from zero to two percent as of July 2020, with several TFP banks requiring additional capital to meet these new prudential requirements. Given the leeway regulators have in setting the CCyB, the process can easily be politicized.
- This is the first of two In Focus that try to establish the extent of loan “evergreening” in Nepal. The starting point of these two notes is the assumption that the country’s commercial banks are underreporting their problem loans by continuously rolling over a large portion of them without requiring the repayment of principal. What if a regulatory change forces Nepali banks to recognize those revolving loans that obligors are not able to fully repay as a pre-condition for being rolled over as non-performing loans (NPL)? Our analysis shows that the size of this portfolio is non-negligible, and consists primarily of overdraft facilities, and, at some banks, of demand loans.
- Part 2: The IMF stated in 2019 that half of Nepal’s banks’ loan book consists of overdraft and working capital loans, which typically roll over continuously and whose loan quality is hard to establish. The IMF also warned of the related risk of evergreening and the fact that historically low NPL ratios may conceal a problem of weak asset quality. We agree with this assessment but have shown in Part One that the situation differs markedly across banks. Nepal’s commercial banking sector’s asset quality may be overstated significantly but relatively sound capitalization would cushion a sudden stop to evergreening practices. The introduction of a new countercyclical capital buffer changes this picture. The sector would require about 1.4% of risk-weighted assets (RWA) in fresh capital, representing a significant burden also on the economy as a whole.
- This first of two In Focus looks at regulatory forbearance (RF) from a macroeconomic perspective and assesses the potential outcome for the banking sector. RF is a key concessionary strategy employed by regulators around the world to help both borrowers and banks cope with the economic crisis resulting from COVID-19. While an expedient short-term measure, there are known long-term risks associated with it. These risks are higher the deeper and longer the measures are, and the more vulnerable the underlying economy is. Using a “RF Index”, we find that among the four chosen case studies in South Asia, the likely negative effects of RF are the highest in Sri Lanka, followed by Nepal.
- This is the second part of two In Focus looking at regulatory forbearance (RF) in the context of COVID-19. While the first instalment took a macroeconomic perspective, this note will look more closely at the regulatory and supervisory implications of COVID-19 and propose an international reporting standard for asset quality in the COVID-19 environment. An upcoming In Focus issue will quantify the impact of COVID-19 on asset quality and capitalization of selected banking sectors in the TSCFP.
- The following note will look briefly at the transformation of trade finance (TF) over the last decades and at what happens with TF during a crisis. While TF generally performs better than other areas of finance, it gets cut back due to contagion. This is confirmed by some recent case studies. Sri Lanka is in the middle of a serious balance of payment (BoP) crisis that has already disrupted external trade. While TF is unlikely to be a major source of defaults, it can no longer operate normally due to a persistent shortage of FX and other market dislocations.
- This note is a follow-up to the In Focus on trade finance (TF) during times of crisis. It presents four systemic TF crisis case studies and three country-specific ones. The former provides important context regarding the historical evolution of the asset class. The financial performance of TF instruments remains well above that of other short-term financial flows, but its provision usually retrenches in times of crisis given its low-margin nature. The country case studies show that a shortage of FX in the market curbs TF volumes and that once a devaluation occurs, TF usually recovers quickly. Finally, movements in international bond spreads seem a good predictor of changes in TF volumes, not least because TF limits are assessed with standard credit risk models.