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2012, May 22

Greece Crisis: How Exposed Are Asia's Banks?

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Greece Crisis: How Exposed Are Asia's Banks?

by Moody's Investors Service, 13 February 2012
topics:
Finance and Banking
tags:
Asian banking Corporate finance Euro Crisis

Banks in the Asia Pacific region have performed remarkably well through more than three years of financial turmoil, including the ongoing European sovereign and banking crisis.

 
Our central scenario is that this resilience will generally persist. However, we observe that the risks to that scenario have increased, warranting a closer examination of how bank creditors could be affected under “tail risk” developments.
 
We remain cautiously optimistic, but we acknowledge that a further deterioration of the euro area crisis could significantly, and perhaps rapidly, increase the odds of spillovers on some banking systems in the region.
 
We provide our preliminary view on which banking systems are most vulnerable to such a downside scenario.
 
Although of a modest magnitude, some evidence that the economies and banking systems of Asia Pacific are not decoupled from the euro area crisis has started to emerge. Since the second half of 2011, we have noted a broad slowdown in exports from Asia Pacific, general weaknesses in Asian currencies that have reversed their earlier strengths, and increasing anecdotal evidence of European banks selling their portfolios of Asia-Pacific-related loan books
 
These developments suggest that, for the region’s financial systems, the proximate impacts of a worsening euro area crisis could come from:
 
  • the asset side of banks’ balance sheets, such as through weakened corporate credit profiles, especially for exporters
  • the liability side, via higher debt refinancing risks and credit risk premia pushing up wholesale funding costs, and
  • additional strain on the balance sheets of banks in the region as they try to absorb the loan books of retreating euro area banks
 
We analyze and classify 16 banking systems in Asia Pacific into three categories, in terms of their exposure to extreme distress in the euro area: More Exposed, Exposed, and Less Exposed.
 
The classification is based on our assessment of five main areas:
1) a banking system’s dependence on external funding;
2) the significance of euro area banks in individual banking systems;
3) economic dependence on exports;
4) the overall challenges faced by the banking system; and
5) government’s or central bank’s capacity to support banks, if needed.
 
We conclude, based on these factors, that the banking systems in Australia, New Zealand, Korea and Vietnam are the ones most exposed to fallout from the euro area.
 
While these systems appear less exposed than they were at the time of the Lehman Brothers shock in 2008, we assess them as more vulnerable to the first-round impact of a further worsening of the euro area crisis that could pressure their standalone financial strengths compared with other systems in Asia Pacific, notwithstanding the possibility that some of their governments could provide support to alleviate these impacts.
 
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