19 Sept 2008, 30 pages

Distress in developed markets: liquidity (and
capital) not a big concern in Asia
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Money markets have seized up in the developed world, and central
banks, in a co-ordinated action led by the US Fed, have injected
massive doses of liquidity to keep the banking systems afloat. Partly a
crisis of confidence (that the counterparty may need more capital due
to losses on high-risk securities exposures), it has brought into
question the business model of wholesale funded banks.
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Can it (or has it) spread to Asia? Some markets have faced tightening
and central banks have acted to relieve the liquidity of banks: Indonesia
reduced the repo rate for funding of banks by 200 bp, India has allowed
the repo of government securities up to 1% of deposits, while Taiwan
has trimmed the reserve ratio on demand deposits by 1.25% and that on
time deposits by 0.75%. It is important to note that no central bank
(except China lending rate) has cut the monetary policy rate.
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Highly capitalised (toxic securities exposure in a few cases, small and
manageable) banks in Asia are also very liquid and are funded by core
customer deposits. The main exceptions to this are Korean banks and
selected names in other markets (TISCO, Danamon, etc.), while the
most liquid banking systems are those in China, Hong Kong and the
Philippines. We believe it is possible that local banks may gain in
deposits from the dislocation in some of the foreign banks operating in
Asia. Almost all the banks in our Asia financials portfolio enjoy cheap
funding from low-cost deposits.