Wednesday, December 7, 2011

The Rise of Global Banks in Emerging Market: Future of Banking #3

Thorstein Beck has edited an e-book for Vox on "The Future of Banking." It consists of 12 short and highly readable essays by expert economists, based on their academic research. The book is packed full of interesting and relevant analysis. This is the first of three posts on a few of the ideas that jumped out at me. The topics of the three posts are:

1) The dangers of persistently low interest rates
2) The misguidedness of a financial transactions tax
3) The rise of global banks in emerging markets 

My twentieth-century mind is used to thinking of global banking as an industry dominated by banks from high-income countries. That believe is already outdated, and becoming more so. Neeltje van Horen provides some background in "The changing role of emerging-market banks."

Although many in the West are not familiar with emerging-market banks, they are by no means small. In fact, the world’s biggest bank in market value is China’s ICBC. The global top 25 includes eight emerging-market banks. Among these, three other Chinese banks (China Construction Bank, Agricultural Bank of China, and Bank of China), three Brazilian banks (Ita├║ Unibanco, Banco do Brasil, and Banco Bradesco) and one Russian bank (Sberbank). While excess optimism might have inflated these market values, these banks are large with respect to other measures as well. In terms of assets all these banks are in the top 75 worldwide, with all four Chinese banks in the top 20. Furthermore, in 2010 emerging-market banks as a group accounted for roughly 30% of global profits, a third of global revenues, and half of tier 1 capital."

Van Horen gives a number of reasons why growth of emerging market banks will outpace that of banks from advanced economies:

  • "[L]oan-to-deposit ratios in general are very low due to the net saving position of these countries. This sheltered emerging-market banking systems to a large extent from the collapse of the interbank market and reduced the need for substantial deleveraging. This allows them now to continue lending using a stable and often growing source of deposit funding."
  • "[M]ost emerging-market banks already have high capital ratios, limiting pressures for balance sheet adjustments. In addition, the new capital rules under Basel III are likely to be much less painful for these banks as they typically have less risky assets and their investment-banking business tends to be small."
  • "[A] large part of the population in the emerging world is still unbanked. This provides for ample growth opportunities in these markets. In contrast, due to overall economic weakness and ongoing deleveraging among firms and households expected credit growth in advanced economies is low."
  • "[T]he macroeconomic outlook in these countries is much better than that of advanced countries. Not faced with major sovereign debt problems nor large current-account deficits, most emerging markets are on pretty solid footing. Even though they will not be isolated from the problems in Europe and the United States, the dependency of these markets on the West has diminished in recent years."
I believe that if the U.S. economy is to grow at a robust pace over the next decade or two, it needs to figure out how to hook itself to the rapid growth that is occurring in emerging markets around the world. One of my standard examples is that this can happen as emerging markets where the legal and financial institutions can be rather shaky make use of the more developed financial, legal, and managerial structures of the U.S. economy. For example, while emerging market economies invest in safe U.S. assets, like  Treasury bonds, funds flow from the U.S. back these emerging markets looking for private sector investment opportunities. (For example, see my July 13, 2011, post on "Producing Safe Assets, Searching for Risky Opportunities.") But van Horen's essay makes me wonder whether emerging markets will actually need the institutional infrastructure of U.S. and European banking and finance for very long, or whether they are moving into position to provide these lucrative industries within their own countries.