asia and covid

Asia's banks have been shielded from the impact of non-performing loans by central bank assistance, but as this support is comes to an end they are faced with a possible asset crisis.

Asia’s banks look to have weathered the Covid-19 storm on average better than many of their international counterparts. The region’s countries boast some of the lowest case numbers of coronavirus in the world and, as a result, many have been able to restart their economies earlier than in other regions. All of this has helped the banks maintain strong fundamentals in their respective markets. 

But success has been mainly reliant on the fiscal support of the governments and central banks. Huge stimulus packages and loan moratoria have helped to keep the number of non-performing loans (NPLs) at bay throughout periods of lockdown and the resulting contraction in export markets. However, this level of support cannot last forever and some markets are grappling with the possibility of suddenly being impacted by delinquent debt at a time when their economies are still trying to increase their gross domestic product to previous levels. 

Global regulation has also been a help to many domestic banking sectors. The capital buffers required under the Basel III rules have helped banks to build up funds to help in precisely these circumstances. But the banks that benefit the most are the large, well-capitalised institutions. For the smaller banks, it is a struggle dealing with the impending end of central bank measures and the impact of the NPLs without substantial financial backing. And for those countries that are still moving towards Basel II compliance, these buffers simply do not exist at all. Without extra central bank or government support, these institutions are stepping into the unknown. 

The question now is where can these banks find the additional capital required to see through the Covid-19 crisis. Under the current conditions, they are not the most attractive of options for private sector investment. For some, it might mean looking to their foreign parent banks for financial support, or even reaching out to form such a relationship to increase capital and shield against the risk of further market disruption. Regardless of the size of the bank and economy, the sector must continue to operate under these new conditions until the coronavirus is contained and the global economy is back on its feet.

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