Banks and the Economy: ASEAN Banking Consolidation

This past November, the credit rating agency Standard & Poor’s gave a free webcast on ASEAN Banking Consolidation. I thought this would be a good way to further illustrate the connection between banks and the economy, which we briefly touched upon in our post on monetary policy. In this article, we will look at 1) banking integration and why it would help the ASEAN member states, 2) the progress of integration, and 3) the economy and banking sector of one member state, Singapore, to see how banks are systemic to the development of an economy.


The Association of Southeast Asian Nations (ASEAN) is an economic and political organization of Southeast Asian nations. Member states include Indonesia, Malaysia, the Philippines, Singapore, and Vietnam. The purpose of ASEAN is to, among other goals, “accelerate the economic growth, social progress and cultural development in the region through joint endeavors” of member states.

"ASEAN Flowers Sketch" (ink and watercolor, 28.3x19.0cm)

“ASEAN Flowers Sketch” (ink and watercolor, 28.3×19.0cm)

One initiative to accelerate economic growth in the region is to deepen economic ties, similar to what has been accomplished with the European Union. An example of this initiative is bank consolidation within ASEAN. Currently, many of the member states have banking industries that are protected, meaning that only local banks can set up shop within the country. The idea is that member states will liberalize their banking industries, making them to foreign competitors, allowing for larger banks within the region to enter different markets and merge/acquire local players. The result would be 1) larger banks that can compete globally with other big banks around the world and 2) readily-available loans for firms and households in ASEAN member states. Both results would significantly grow the economies of the countries that are part of ASEAN.

Standard & Poor’s Views

Note that these views are of November 2014 and do not necessarily reflect current views.

Standard & Poor’s is a credit rating agency. This means that they research on debt that companies and countries issue and assess whether or not they are able to pay for this debt.

ASEAN Banking Consolidation

S&P believed that challenges exist for regional bank consolidation for several reasons:

  1. Member states are liberalizing their banking industries at different paces, ie, some have stringent foreign bank ownership restrictions versus others.
  2. Some banking industries are very fragmented, meaning that there are many players in the market. For example, Indonesia has over a hundred banks.
  3. Valuations for the smaller banks may be high – basically, they may be expensive.
  4. Commercial incentive for acquiring a small bank may not be there, meaning that the bigger bank may already have the services that the smaller bank provides.


Singapore faces a real estate bubble that may negatively affect the economy, with property prices rising at a significant pace over the past four years. On the other hand, the government is seeking to stabilize prices.

About 1/12 of Singapore bank exposure is to real estate, which may be a burden on banks, but capitalization is adequate. Singapore’s banks would pursue expansion into Indonesia, but current valuations for Indonesian banks are expensive.

The real estate bubble in Singapore may be a problem if leverage is high, meaning many buyers are buying property on credit. While credit is often needed to help both property investors and buyers and is part of a functioning economy, too much credit risks a string of defaults that could negatively affect the broader economy. The government is well aware of this problem and is enacting policies to contain prices.

As for the banks, they are “exposed” to real estate in the sense that they lend money to real estate investors, and if the bubble pops, these investors may not be able to pay back the banks. However, capitalization is adequate, which means they have reserves to pay back their own debts if their real estate loans are not paid. Remember that banks both borrow and lend money.


Banks are crucial to an economy because they provide loans. Firms and households need to borrow money to go about their economic activities. In aggregate, these activities would abet GDP growth and economic development. Thus, ASEAN’s drive to consolidate its banking sector is an initiative to achieve this purpose, although significant challenges remain.

However, debt is double-edged sword. In the case of Singapore, bank loans spurred the real estate sector, but in the process created a bubble. Fortunately, both the banking sector and government are aware of this property bubble, with banks having enough reserves to withstand real estate defaults, and the government enacting measures to contain prices.

See you in the next post!

Ramon Rodrigo Cuenca, CFA
Equities Analyst


Standard & Poor’s webcast on ASEAN banking consolidation

ASEAN homepage

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