Saturday July 28, 2012
Bankers: Malaysia not shielded from contagion risk
By JOHN LOH
KUALA LUMPUR: The idea that Malaysia is shielded from contagion risks arising from the distressed Western economies is a myth, according to banking executives.
“The whole notion of Malaysia being insulated is something we need to be less sanguine about,” Hong Leong Bank group chief risk officer (CRO) Justin Soong said during a panel discussion at the Asian Strategy and Leadership Institute's Malaysian Banking Summit.
Panellist Jeroen Thijs, CRO of Bank Islam Malaysia Bhd, echoed this, saying a country could never truly mitigate contagion risks, especially if it was plugged into the global economy.
“The only country that might be isolated from such risks is North Korea, but the rest are dependent on trade flows. If something goes wrong, some macroeconomic factors in Malaysia could change and affect banks and consumers here.
“I don't think you can mitigate or eliminate contagion risk. The best a bank can do is to make sure it is diversified across geographies, industries and instruments,” he said.
Nonetheless, proper risk management systems were now entrenched in the local financial services industry and part of “nearly every decision that banks make,” according to RAM Ratings deputy CEO Promod Dass.
Thijs said that prior to the Asian financial crisis, there was not much emphasis on risk management in the country.
“Now we see that our risk management is on par with international standards, and sometimes even better than some Western banks.”
Even with the current safeguards and systems in place, Dass said there was a need to engender a “risk culture” at all levels.
“Risk management is about the people. It is not just the CRO's role, but goes down to the officer that brings in the loan.
"The hardest thing for any risk management team is to stand back and stay away from herd mentality in the industry,” he said.
“While every bank in town is lending to a particular sector or pursuing a fashionable product or merger or acquisition, they must consider whether it is in their best interests in the long run.
"The banks that survived the crisis were the ones which were good at saying no during the best of times,” he added.
Meanwhile, Thijs remarked that he was “baffled” by the continued reliance by banks on risk models and projections, citing the example of recently-disgraced US bank JP Morgan, which pioneered its use.
“We have seen over and over again that these models don't work. They are useful in normal times, but when stress breaks out, they are very un-useful' as they create a false sense of security.”
On the other hand, he named Wells Fargo as a case study for how banks should behave during both boom and bust.
“In the good times, they adhered to strong underwriting practices, and were losing market share hand over fist.
“I can assure you their shareholders were not happy," Thijs explained.
“But they said, No, we don't believe in loaning money to people who can't pay back'. Then the crisis hit and they didn't go under. Now they have the firing power and have acquired healthy assets from banks which needed to raise money.
“They have the highest market share of mortgages in the United States currently without ever having to compromise on their risk standards.”