“2006 Asian Banks Competitiveness Ranking” Report

At the Request of “21st Century Business Herald”

Jointly conducted by

Faculty of Business Administration, The Chinese University of Hong Kong

Guanghua School of Management, Peking University

Written by: HE Jia, Hugh THOMAS
Researchers: HE Jia, Hugh THOMAS, ZHOU Chunsheng
Research Assistants: WAN Yanyan, SU Jun, MAO Tianshi

Part One: Background for Asian Banks’ Competitiveness Study

I. Asian Banking Reform

Reform has surged across the banking industry in Asia over the last decade. In the large, insular, developing economies of China and India, the reform movement originated with internationalizing and introducing market mechanisms to stimulate previously state-owned systems. In Japan and the other traditionally market oriented Asian economies, the reform was born out of crisis. Japan’s slow and painful, a decade-long recession of the 1990s, following the bursting of the bank-financed real estate and stock markets bubbles, finally led to a consensus on the need for reform. But real urgency did not enter banking reform in Asia until the Asian Financial Crisis struck the smaller, developing, market-based economies of Asia in 1997. In the run-up to the crisis, capital inflows helped fuel debt-financed investment, while stable exchange rates and surging economic growth masked the risks of many loans to leveraged and risky companies, often based more on connections than sound credit analysis. Many banks were profitable notwithstanding corruption, poor control and lax banking practices. In mid 1997, investor sentiment turned against the region, precipitating a drop in asset values, an exodus of capital, consequent pressure on local currencies, abandoning of pegged exchange rates and rapidly rising interest rates precipitating recessions. Corporate bankruptcies increased, severely