ADB warns of risks as cross-border banking takes hold in region


CENTRAL BANKS in Southeast Asia need to prepare liquidity support and safety nets to mitigate any risks stemming from financial digitalization and cross-border banking, the Asian Development Bank (ADB) said on Monday. 

In a report, the ADB said digitalized transactions have been beneficial to the banking industry in the Association of Southeast Asian Nations plus China, Japan, and South Korea (ASEAN+3), remains important for central banks to consider changes to their regulatory framework in anticipation of such risks.

“In the age of digitization, financial transactions will become more globalized as such transactions cross borders more easily. However, cyberspace makes conflicts of geographical as well as functional jurisdictions more complex,” the ADB said.

“Though financial services may go beyond borders, financial regulations continue to be based on territoriality; thus, cross-border regulatory problems must be solved through an appropriate home and host supervisory arrangement. Building trust and confidence in peer regulators is the basis of any effective cross-border regulatory cooperation,” it said.  

The bank added that the ASEAN+3 is unique compared with other regions, noting that even though intraregional economic linkages are extensive, member economies are in different stages of economic development and trade in their own currencies.

According to the ADB, supervisory entities must be organized for effective coordination. Central banks should also work more on data standardization and efficient data collection, which would allow regulators to use advanced technology in supervising the financial industry.

“The expansion of cross-border banking activities will create more difficulty for supervision and crisis management. Mismanagement of liquidity can trigger a failure of a banking group regionally. The home supervisor can provide liquidity to support the settlement of its own currency, but it is not possible to stop the chain reaction of failures in other markets,” the report read.

“Therefore, additional liquidity measures in different local currencies may need to be considered along with the expansion of cross-border financial services, depending on their size, impact on payment and settlement systems, and impact on regional financial stability,” it said.

The Bangko Sentral ng Pilipinas (BSP) has signed a memorandum of understanding with other ASEAN central banks to strengthen collaboration in payment connectivity.

The Memorandum of Understanding on Cooperation in Regional Payment Connectivity (RPC) was signed on the sidelines of the G20 Leaders’ Summit with Bank Indonesia, Bank Negara Malaysia, Monetary Authority of Singapore, and Bank of Thailand on Nov. 14 in Bali.

The RPC agreement aims to foster a more inclusive financial ecosystem by enabling fast, seamless, and cheaper cross-border payments across the region.

“Home and host central banks in ASEAN+3 must prepare their own cross-border, short-term liquidity measures, such as cross-border collateral arrangements and bilateral swap agreements, as another layer of regional financial safety nets. It is important to consider regional risk mitigation measures along with the rapid expansion of new financial services before any crisis happens,” the ADB said.  

The ADB projects digital transformation in the region to continue gathering pace in the medium term.

The ADB said the digital-banking penetration rate approached 90% in 2021 in some regional economies. Digital wallets have also taken hold as the dominant e-commerce payment platform, accounting for 68% of regional e-commerce transactions by value in 2021, which is projected to expand to over 72% by 2025 with the declining use of cash.

“The progress of financial innovation and digitalization is a great opportunity for the financial industry. Banks have been utilizing financial technologies to improve services (FinTech) and nonfinancial firms have emerged to utilize their technological advantages and offer a part of traditional banking services (TechFin) at a reduced cost, illustrating that the banking industry has increasingly become competitive in recent years,” the bank said.

The ADB recommended that central banks in the region ensure a level playing field between incumbent banks and new emerging companies, with no special treatment in bank licensing standards.

Regulators must also effectively utilize regulatory and supervisory technologies (regtech and suptech) to improve information-sharing.

The BSP has deployed the Advanced SupTech Engine for Risk-Based Compliance (ASTERisC*) among selected BSP-supervised financial institutions (BSFIs) in a bid to digitalize its processes.

ASTERisC* is a unified regtech and suptech solution that streamlines and automates reporting and compliance assessment for BSFIs’ cybersecurity risk management. It supports the BSP’s end-to-end process on cybersecurity supervision. — Keisha B. Ta-asan