Commentary: Financial Services Reform: Just Do ItPaul Magnusson
It isn't just the Thai baht, the Indonesian rupiah, and the Korean won that are taking a beating from the turmoil in Asian financial markets. A little-noticed but crucial series of trade negotiations among 43 nations on opening financial services to more global competition has also been laid low by the Asian financial flu. Hopes of bringing Asian nations into the open-market talks are fading as governments and banks deal with the continuing financial crisis.
Once again, the opportunity to strengthen the world's financial system is slipping away. The last time international talks on opening up financial services broke down, in 1995, it was due to the reluctance of Asian nations--including Malaysia and Thailand--to open their banking and insurance markets to foreign investment. It's small comfort to know that today's spreading crisis might have been less dire had Asian nations been willing to open up two years ago.
FINAL PUSH. Greater foreign participation in Asia's highly protected financial-services markets wouldn't just benefit Western banks, insurance companies, and securities firms. It would also offer a free-market model--rather than cronyism and heavy-handed industrial policy--for making investment decisions. Also, more informative accounting and the discipline of competition would weed out those firms with weak business practices, encouraging the prudent and punishing the improvident. "We see time and again a weak financial sector at the center of these [Asian] problems," said Robert E. Denham, chairman and chief executive of Salomon Inc., in a briefing during the Asia-Pacific Economic Cooperation summit in Vancouver on Nov. 22-25.
Indeed, Yamaichi Securities Co., Japan's fourth-largest and oldest brokerage, might not have failed so spectacularly on Nov. 24 had its finances been subject to more scrutiny by investors and regulators. The firm's practice of covering losses suffered by its largest customers and its habit of hiding liabilities on incomplete balance sheets--not to mention its cozy ties to the Yakuza underworld--would not have stood up to a free-market examination.
That's why U.S. Trade Representative Charlene Barshefsky had hoped to use the APEC summit to make a final push for the financial-services talks. APEC provided the last big opportunity for movement before the parties face a self-imposed Dec. 12 deadline. Barshefsky had hoped to add 20 countries to the 43 that have already offered various market-opening deals. Among other things, she hoped to get the Asian nations to agree to more foreign investment (table).
"NOT THERE YET." The goal of the financial-services negotiations is to push countries to offer market liberalizations of their own choosing, such as increased disclosure, rather than agree to a single regulatory model. Unfortunately, several Asian nations are using the currency crises in the region as a reason for putting off even that level of reform. "We are not there yet," said Barshefsky after meeting with her APEC counterparts to discuss the reform agenda.
The reluctance in Asia is understandable. At this painful juncture, Japanese banks and Philippine insurance companies don't want to compete against foreigners unencumbered by an avalanche of failed loans and sour investments. But over the long term, everyone would win if financial-services markets are freed of regulations designed to hamper competition. The Dec. 12 deadline may have to be moved back, but reform shouldn't have to wait another year.