By Hong Liang (China Daily)
Updated: 2007-09-04 07:11

The credit crisis arising from the US subprime mortgage woes may not have as big an impact on the markets in Asia, and China in particular, as it has on those in the US and Europe. But the problems have brought into sharp focus numerous pertinent issues weighty enough to cause financial planners around the world to rethink and re-evaluate their policies.

One of the foremost questions is the future of commercial banks.

As developments in the US and Europe show, the middleman role for commercial banks between depositors and borrowers is falling into eclipse because more and more corporations are raising capital directly from the public by issuing debt instruments and their derivatives that can be traded easily in the various capital markets.

Thanks to the highly developed and relatively transparent market for such instruments, it is possible to securitize almost anything that promises to generate a predictable and consistent stream of income.

The outbreak of the credit crisis in the US, therefore, must not be seen as a condemnation of the securitization trend. The crisis merely shows up the problems that need to be addressed by the supervisory agencies to facilitate and ensure a more orderly development of the market which is providing an efficient channel for corporations to raise capital directly from the public, who, in turn, are willing participants in search for higher returns on their savings than bank interest rates.

Many commercial bankers long ago saw what was coming and made preparations to adapt to the changes by focusing on expanding their service-based incomes to such businesses as corporate advisory and personal wealth management. The large commercial banks, empowered by their huge capital bases, have also got into the securitization act in a big way through their investment and private banking subsidiaries.

To be sure, the small- to medium-sized companies which lack the clout to raise capital in the market, will continue to finance their operations with loans from commercial banks. But in a highly competitive market where interest rates are free, commercial banks are finding it increasingly difficult to make a profit because of the narrowing spread between the lending rates and cost of funds. The thinning profit margin has prompted some banks in Hong Kong, for example, to charge service fees on small deposits.

The threshold of the securitization business is high in terms of capital and expertise. For that reason, the principal players in the market are limited to the large international banking groups that control extensive deposit collecting networks.

Taking the long-term view, the Shanghai municipal government has proposed to establish a financial powerhouse, built around the Pudong Development Bank, the largest Shanghai-based joint stock commercial bank. It is hoped that such an entity will have adequate enough financial resources and business scope to compete with the international banking groups as Shanghai is making rapid progress to becoming an international financial center.

Playing host to nearly all the major international banks in the world, Hong Kong has remained structurally way ahead of other aspiring financial centers in the region. To keep its lead, the Hong Kong monetary officials have in the past several years reformed the regulatory framework to bring it more in line with other international financial centers.

The US credit crisis is troubling, but it serves to focus people's minds on the big changes that will reshape the global financial marketplace.

E-mail: jamesleung@chinadaily.com.cn

(China Daily 09/04/2007 page10)