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ADB Institute Series on Development Economics Series Editor Naoyuki Yoshino Tokyo Japan Asia and the Pacific has been advancing in many aspects of its development, but the potential for growth is vast. The ADB Institute Series on Development Economics aims to identify and propose solutions using a multidisciplinary approach to important development issues facing economies in the Asia and Pacific region. Through edited volumes and monographs, the series showcases the research output of the Asian Development Bank Institute as well as its collaboration with other leading think tanks and institutions worldwide. The current focus of the series is infrastructure development; financial inclusion, regulation, and education; housing policy; central and local government relations; macroeconomic policy; and governance. The series also examines the major bottle- necks to greater stability and integration in Asia and the Pacific, while addressing timely issues including trends in microfinance, fiscal policy stability, and ways of tackling income inequality. The publications in the series are relevant for schol- ars, policymakers, and students of economics, and provide recommendations for economic policy enhancement and a greater understanding of the implications of further capacity building and development reform in Asia and the Pacific. More information about this series at http://www.springer.com/series/13512 ADB Institute Financial Services Agency, Japan International Monetary Fund Regional Office for Asia and the Pacific Editors Financial System Stability, Regulation, and Financial Inclusion 1 3 PANTONE 281C Editors ADB Institute International Monetary Fund Chiyoda-ku Regional Office for Asia and the Pacific Tokyo Chiyoda-ku Japan Tokyo Japan Financial Services Agency, Japan Chiyoda-ku Tokyo Japan ISBN 978-4-431-55253-6 ISBN 978-4-431-55254-3 (eBook) DOI 10.1007/978-4-431-55254-3 Springer Tokyo Heidelberg New York Dordrecht London Library of Congress Control Number: 2014957757 © Asian Development Bank Institute, Financial Services Agency, Japan, and International Monetary Fund 2015 This work is subject to copyright. 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Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com) Preface In light of the current global financial and economic situation, financial authori- ties face a number of key challenges, including maintaining financial stability; managing sovereign risk; ensuring long-term finance for stable economic growth; promoting greater access to financial services for both households and small and medium-sized enterprises (SMEs); and fostering a competitive financial industry. Striking the appropriate balance in achieving these objectives through financial supervision and regulation is an important policy issue for financial regulators. This book provides the record of a joint conference organized by the Asian Development Bank Institute (ADBI), the Financial Services Agency, Japan (FSA), and the Inter- national Monetary Fund (IMF) Regional Office for Asia and the Pacific on the topic “Financial System Stability, Financial Regulation, and Financial Inclusion,” held on 27 January 2014 in Tokyo. The global financial crisis of 2007–2009 and its aftermath focused attention on possible trade-offs between financial stability and moves to increase competition in the financial sector, which was the topic of the first session of the conference. Increased competition in the financial sector is generally found to be positive for economic growth, but can also undermine economic stability due to excessive risk- taking and too-light regulation. Increased cross-border banking activity can raise thorny issues of coordination of regulation and bank resolution. One unintended consequence of regulatory developments after the global financial crisis was increased concentration in the financial sector as a result of mergers and bank clo- sures, which has the potential to increase problems associated with “too-big-to-fail” and moral hazard. Finally, there is a concern that higher requirements for capital adequacy and liquidity in banking and other financial sectors as a result of Basel III rules will exert a drag on economic growth. The second session focused on access to finance for SMEs. A particular feature of Asian economies is the importance of SMEs, especially in terms of employment, and their strong needs for funds. However, SMEs face difficulties in raising funds compared to large firms, as the lack of financial data makes banks reluctant to lend to them. Limited access to trade finance also makes it more difficult for SMEs to export. Therefore, it is extremely important to reduce the information asymmetry by expanding access to credit information, and thereby facilitate SMEs’ access to v vi Preface stable, long-term finance. Policy measures to ensure smooth financing of SMEs are critical for Asia’s strong and sustainable economic growth. The Credit Risk Database in Japan is a good example of a credit information infrastructure offering comprehensive financial data on SMEs, and there is much scope for Asian countries to develop credit databases of similar coverage and depth. Credit guarantees for SMEs are another way of facilitating SME finance by alleviat- ing credit risks of banks and have been actively pursued in many Asian countries. However, unduly generous guarantees can create moral hazard and delay the need- ed restructuring of nonviable firms. An appropriate balance of risk sharing between banks and credit guarantee corporations should be established. The third session covered issues related to the nexus of financial inclusion, financial stability, and financial education. Enhanced access to finance has two aspects: financing for small businesses and poorer households, but also access to financial services for their financial investment and asset management. The Asian region generally still falls short in both aspects. Postal savings and/or agricultural banks can play an important role in enhancing financial inclusion. Financial regulators must also grapple with possible trade-offs between financial inclusion and financial stability. On the positive side, increased access to savings can provide a larger and more stable source of funding for banks, and the risk characteristics of loans to smaller entities are generally more benign than those of large borrowers, as the latter are characterized by fat tail risks. However, deterioration of lending standards could increase systemic risk, and new categories of financial institutions need to have appropriate frameworks for supervision and regulation. The session also discussed a range of educational programs designed to enhance financial literacy. Financial education for SMEs and individuals can have a sub- stantial impact on their ability to use financial services wisely and prudently, but is lacking in many developing countries. The kind of programs for financial education available to enhance financial literacy and the way forward were also discussed. We believe that the presentations and discussions of this conference provide valuable insights into ways to expand financial inclusion and deepen financial development in Asia while at the same time maintaining financial stability. We hope that this record will prove useful for policy makers, financial market regulators, and academics working on these issues. Naoyuki Yoshino Dean and CEO Asian Development Bank Institute, and Chief Advisor, Financial Research Center (FSA Institute) Financial Services Agency, Government of Japan Odd Per Brekk Director Regional Office for Asia and the Pacific International Monetary Fund Contents Welcoming Remarks ........................................................................................ 1 Hiroshi Okada Session 1: Financial System Stability and Competition in the Financial Industry ............................................................................................ 5 Odd Per Brekk, Ratna Sahay, Akira Ariyoshi, Tokio Morita, Akihiko Kagawa, and Jae-Ha Park Keynote Speech: Current Situation, Challenges, and Future of Regional Finance in Japan .............................................................................. 31 Hisashi Ono Session 2: Finance to SMEs through Banks, Capital Markets, and Other Financial Methods ......................................................................... 41 Suhaedi, Ganeshan Wignaraja, Jongsoon Shin, Wako Watanabe, Yoshiaki Ogura, Salinee Wangtal, and Hisashi Ono Session 3: Financial Inclusion and Financial Education .............................. 69 Tarisa Watanagase, Naoyuki Yoshino, Tomoyuki Furusawa, Peter Morgan, Victor Pontines, Ranee Jayamaha, Pungky P. Wibowo, and Julius Caesar Parreñas Session 4: Panel Discussion: Finance to Ensure Asia’s Economic Growth ............................................................................................ 95 Masahiro Kawai, Muliaman D. Hadad, Mikio Kajikawa, Tarisa Watanagase, Ranee Jayamaha, Hisashi Ono, and Ratna Sahay Closing Remarks .............................................................................................. 121 Masahiro Kawai vii About the Authors Akira Ariyoshi is Professor, School of International and Public Policy, Hito- tsubashi University. Prior to moving to the academia in April 2010, Mr. Ariyoshi accumulated extensive experience in the Government of Japan and international financial institutions in macroeconomic and financial policies, including as Assis- tant Director of Monetary and Exchange Affairs Department and Director of the Regional Office for Asia and the Pacific of the IMF, Deputy Vice-Minister for In- ternational Affairs at the Japanese Ministry of Finance and Director of the Legal and Planning Division at the Japanese Financial Services Agency. He is a graduate of Tokyo University and holds a DPhil from Oxford University. Odd Per Brekk a Norwegian national, has been the Director of the IMF Regional Office for Asia and the Pacific since July 2013. Mr. Brekk joined the IMF in 1987 and has held several senior positions in the European and Asia and Pacific Departments, including mission chief to Indonesia and Lithuania, and Senior Resident Representative in Turkey and the Russian Federation. During 2005–2009, he was the Advisor to the First Deputy Managing Director. Earlier in his career, he worked in the African and Central Banking Departments of the IMF. Before joining the IMF, he was a senior economist at the Bank of Norway. He holds a graduate degree in economics from the University of Oslo. Tomoyuki Furusawa joined the Ministry of Finance in April 1986 after graduating from the Law Faculty of the University of Tokyo. Between 2011 and 2013, he was in charge of designing Japanese financial market regulations including insider-trading regulations and over-the-counter derivatives reforms as Director of the Financial Markets Division at the Financial Services Agency, Japan (FSA). Since July 2013, he has been Director of the Policy and Legal Division, Planning and Coordination Bureau, FSA. Muliaman D. Hadad has served as the Chairman of the Financial Services Agency of Indonesia since July 2012. Prior to his current position, he was Deputy Governor of Bank Indonesia (Central Bank of Indonesia) from December 2006 onward. Before joining the Financial Services Agency of Indonesia, he also held various positions in Bank Indonesia, among others as Head of the Financial System Stability Bureau since 2003 and Director of Banking Research and Regulation ix x About the Authors since 2005. His career at Bank Indonesia spanned 25 years. He currently also serves as Chair of the Indonesia Sharia Economic Community, an active manager at the Indonesia Economist Association, and as lecturer in various universities in Jakarta, Indonesia. He has been published in many scientific journals domestically and internationally and has been a speaker in numerous international forums on financial system regulation and stability. He holds a bachelor’s degree in economics from the University of Indonesia (Universitas Indonesia/UI) and an MPA from John F. Kennedy School of Government, Harvard University in the United States. He earned his doctorate degree in business and economics from Monash University, Melbourne, Australia, in 1996. Ranee Jayamaha is currently the Chairperson of Hatton National Bank PLC, the second largest private bank in Sri Lanka and Advisor to the President of Sri Lanka on banking. She received her PhD from the University of Bradford and an MSc from University of Stirling in the United Kingdom. She was Deputy Governor of the Central Bank of Sri Lanka from 2004 to 2009. During this period, she was the Chairperson of the Financial System Stability Committee, the Credit Information Bureau of Sri Lanka, the National Payments Council, the South Asian Association for Regional Cooperation Payments Council, and the Safeguard Assessment Committee. She was a member of the Monetary Policy Committee, the Sri Lanka Insurance Board, the Securities and Exchange Commission, the Working Group on General Payment System Development of the Bank for International Settlements, the Advisory Committee of the G8 Remittances Working Group, and the Safeguard Assessment Policy Review 2010 of the IMF. She has over 40 years of experience in the fields of economics, banking, finance, and regulation. In November 2012, the University of Stirling bestowed her the Degree of Doctor of the University (DUniv) in recognition of her distinguished career as one of the university’s first master’s graduates in economics and as a person of great distinction in the fields of learning the arts and public affairs. Akihiko Kagawa joined the Bank of Tokyo, Ltd. in 1980. He worked primarily in areas related to foreign exchange and treasury, but he was also assigned to the Corporate Planning Office for a period. When the Bank of Tokyo-Mitsubishi UFJ (BTMU) was established in 2006, he was appointed to the position of General Manager of the International Treasury and Investment Division. Over the years, Mr. Kagawa was assigned to several posts related to global markets, such as General Manager of the Global Markets Sales and Trading Division and General Manager of the Financial Markets Division, developing deep expertise in this field. In May 2010, he became an Executive Officer of BTMU and General Manager of the Corporate Risk Management Division, and was also assigned a concurrent position as Executive Manager of the Corporate Risk Management Division at Mitsubishi UFJ Financial Group (MUFG). In 2012, he became a Managing Director, Chief Risk Officer, and Chief Compliance Officer. Mikio Kajikawa joined the Ministry of Finance in 1982. Since then, he has held a range of important positions mainly in the field of international finance and fiscal policy. His international experience includes the Permanent Delegation to the OECD and as Finance Minister of the Embassy of Japan in Washington, DC,