Asian Financial Regulation Appears To Be Heating Up, But May Be Too Soon To Tell

June 17th, 2014

While regulatory oversight of the financial sector remains at record highs in the United States (US) and across the European Union (EU), Asia has been slower to follow suit, until recently.

Asian regulators have augmented financial oversight in recent months. Some regulators have recently begun to investigate benchmark manipulation in the foreign exchange market as well as illegal trading activities.  In response, China’s State Administration of Foreign Exchange will seek to keep foreign exchange reserves at a more balanced level. The Hong Kong Monetary Authority (HKMA) has ordered several financial institutions to begin internal reviews to support foreign exchange investigations.  The HKMA also appears to be scaling up additional oversight of banking services.  For example, in May the regulator completed 107 investigations into banking complaints, and has more than 400 cases in progress. China also recently initiated aggressive enforcement actions against GlaxoSmithKline for alleged tax evasion.

Despite increased activities, Asia’s financial regulators have received mixed reviews on the effectiveness of their efforts.  The International Monetary Fund (IMF) released a Financial System Stability Assessment on May 23, 2014, commending Hong Kong’s micro-prudential and macro-prudential oversight.  The report also highlighted the merits of the HKMA’s stress tests and minimum capital requirements.  Conversely, China cut its capital reserve requirement ratio against last week for select financial institutions.

The Asia Securities Industry & Financial Markets Association (ASIFMA) has been somewhat critical of Asian regulators’ inaction in addressing global financial issues.  In a report published late last year, ASIFMA said, “There seems to be a real need for a more assertive regional voice among Asia’s regulators.” Financial industry stakeholders have also been critical of the weak regulatory framework in Asian countries.  To illustrate, Piyush Gupta, Chief Executive Officer of DBS, expressed concern with the lack of coordination and understanding among Asian financial regulators to deal with emerging threats including capital flight, shadow banking and liquidity.

So while it appears that Asian financial regulation is comparatively increasing, it may be too soon to tell how substantial and effective these efforts will be.