Chapter 3 Toward a Resilient Financial Sector

Ana Corbacho, and Shanaka Peiris
Published Date:
October 2018
  • ShareShare
Show Summary Details


Financial systems in the Association of Southeast Nations–5 (ASEAN-5) countries weathered the 2008–09 global financial crisis well. There were no systemic banking crises or significant signs of distress, such as bank runs, losses in the banking system, or bank liquidations. In contrast, many advanced economies and some emerging market economies dealt with systemic banking crises in the run-up to the global crisis and the period that followed and had to nationalize banks, freeze deposits, declare bank holidays, provide extensive liquidity support, purchase assets, or grant guarantees.1

In contrast, the Asian financial crisis of the late 1990s was a traumatic episode for the ASEAN-5 financial systems. In Indonesia, of 237 banks, 70 were closed and 13 nationalized. Nonperforming loans reached 32 percent of total loans, and the fiscal cost of the banking crisis was 57 percent of GDP. In Malaysia, the number of finance companies dropped from 39 to 10 through intensive mergers. Nonperforming loans reached 30 percent of total loans, and the fiscal cost was 16 percent of GDP. In the Philippines, 1 commercial bank, 7 of 88 thrift banks, and 40 of 750 rural banks were placed under receivership. Nonperforming loans climbed to 20 percent of total loans, and the fiscal cost was 13 percent of GDP. In Thailand, 59 of 91 financial companies and 1 domestic bank were closed, and 4 banks were nationalized. Nonperforming loans reached 33 percent of total loans, and the fiscal cost of the banking crisis was 44 percent of GDP.2

This chapter takes stock of major initiatives by ASEAN-5 countries following the Asian financial crisis, describes and benchmarks the current structure of financial systems, and assesses financial stability risks. Financial systems built a level of resilience that allowed ASEAN-5 economies to successfully weather the major challenges posed by the global financial crisis. Nowadays, ASEAN-5 financial systems differ in size, access, efficiency, and financial supervision structure. However, they are similar with regard to key players, the presence of financial conglomerates, and the influential role of governments, as well as their evolving structures and emerging risks.

Major Reforms Since the Asian Financial Crisis

In response to the Asian financial crisis, ASEAN-5 countries introduced significant reforms that made financial systems much more resilient. The reform efforts were concentrated in the following areas:

  • Regulation and supervision practices and institutional architecture

  • Development of bond markets in local currencies

  • Restructuring of firms under financial stress

Regulation, Supervision, and Institutional Architecture

Before the Asian financial crisis, ASEAN-5 financial frameworks suffered from several structural weaknesses in regulation and supervision. Banks and companies relied extensively on short-term foreign currency loans to fund projects that generated receipts in domestic currency. This approach created both maturity and currency mismatches. In some cases, supervisory agencies did not have enough capacity, authority, and independence; fit-and-proper rules for owners and managers of financial institutions were weak or did not exist; loan classification and provisioning rules were inadequate; policies limiting connected lending and foreign exchange exposure were not effective; and financial institutions’ publicly available data were scarce—neither supervisors nor the market had access to timely reports on banks’ balance sheets and exposures.

Financial systems’ regulation and supervision were overhauled in ASEAN-5 countries after the Asian financial crisis. All countries made efforts to improve their supervisory capacity and powers. Bank supervisors embraced Basel core principles, strengthened their supervisory policies and regulations, and required banks to hold higher levels of capital. Regulations on loan classification, provisioning, and income from nonperforming loans were aligned with international best practices in all countries. Regulations on connected lending, liquidity management, foreign currency exposure, and large exposures were improved. Fit-and-proper rules for owners and managers were revamped. Measures were taken to strengthen accounting, disclosure, and auditing standards.3

ASEAN-5 countries followed different models for the institutional structure of financial regulation and supervision:

  • In Indonesia, the Financial Services Authority was established in 2011 as an integrated regulator to oversee the entire financial system. It assumed oversight responsibilities for capital markets and nonbank financial institutions by the end of 2012 and for banks by the end of 2013. Bapepam-LK was previously in charge of supervising capital markets and nonbank financial institutions, while the central bank (Bank Indonesia) was responsible for the oversight of banks. In the taxonomy spelled out in Box 3.1, Indonesia moved from the third to the fourth category.

  • In Malaysia, the central bank (Bank Negara Malaysia) regulates banks, insurers, and prescribed development financial institutions. Securities Commission Malaysia supervises capital markets. Malaysia falls into the third category in the taxonomy in Box 3.1.

  • In the Philippines, the central bank (Bangko Sentral ng Pilipinas) supervises banks and some nonbank financial institutions. The Insurance Commission supervises insurance, and the Securities and Exchange Commission supervises capital markets. The Philippines is in the second category in the taxonomy in Box 3.1.

  • In Singapore, the central bank (Monetary Authority of Singapore) oversees the entire financial system. Singapore is in the fifth category in the taxonomy in Box 3.1.

  • In Thailand, the central bank (Bank of Thailand) supervises banks and some nonbank financial institutions. The Office of the Insurance Commission oversees the insurance sector, and the Securities and Exchange Commission is in charge of capital markets. Thailand falls into the second category in the taxonomy in Box 3.1.

There is no consensus on whether integrated financial supervision is optimal. Cihak and Podpiera (2006) review the literature and conclude that each setup has advantages and disadvantages. In principle, integrated financial supervision is more effective for dealing with financial conglomerates. However, the integrated supervisor could become too large an organization to be managed effectively. Moreover, it is easier to capture a single supervisor than multiple supervisors. To a large extent, the optimal structure of supervision is country-specific and driven by practical considerations.

Development of Bond Markets in Local Currency

Since the Asian financial crisis, ASEAN-5 countries have undertaken several efforts to develop bond markets in local currencies. Private sector credit was perceived to be excessively reliant on banks and on loans in foreign currency. The development of bond markets in local currencies would help simultaneously reduce foreign exchange mismatches and decrease the concentration of credit and maturity risks in banks. Bond markets in local currencies would open another financing channel, a financial spare tire for when the banking system is impaired. Bond contracts are typically of longer maturity than bank loans and, unlike bank loans, can be traded, allowing the transfer of risks. This flexibility suggests that bonds provide larger funding and longer maturities than bank loans.

The Asian Bond Market Initiative, created by the ASEAN+3—an organization that fosters cooperation between the ASEAN countries and China, Japan, and Korea—promoted the development of local currency bond markets, especially by facilitating national and regional market infrastructures for trading bonds. The initiative set up working groups to study various topics (for example, issuance of new securitized debt instruments, establishment of a regional bond guarantee agency, development of a regional settlement and clearance system) and make recommendations. With regard to country-specific initiatives, Felman and others (2011) report that the Philippines introduced a new Securities Regulation Code, institutionalized delivery versus payment through a real-time gross settlement system, and launched an interdealer platform to encourage exchange trading of fixed-income instruments. Malaysia introduced a regulatory environment with no withholding tax, no capital gains tax, and no restrictions on investing in Malaysian ringgit bonds. Foreign exchange and interest rate hedging instruments were also introduced.

Institutional Structures of Financial Regulation and Supervision

Institutional structures for financial supervision vary widely across countries. Several factors can influence the choice of a specific structure for a given financial system, including the size of the financial system, its structure, the presence of conglomerates, the degree of independence of the central bank, the number of financial crises in the country, and other considerations.

Melecky and Podpiera (2013) describe five possible institutional structures:

  • 1. Sectoral supervision with banking supervision in an agency other than the central bank

  • 2. Sectoral supervision with banking supervision in the central bank

  • 3. Partial integration, in which two subsectors are supervised by the same institution, either the central bank or an agency outside the central bank

  • 4. Integration of supervision of financial subsectors in a financial supervisory authority

  • 5. Integration of supervision of financial subsectors in the central bank

Over the past decades, there has been a tendency to integrate prudential supervision of financial systems. Melecky and Popdiera (2013) document a decrease in the proportion of countries with the traditional sector-by-sector approach to supervision from 62 percent in 1999 to 44 percent in 2010. Moreover, the proportion of countries with integrated (also called unified or consolidated) supervision increased from 14 percent to 33 percent. This shift was a response to the increasing integration of financial institutions across different segments of the financial system (that is, the formation of financial conglomerates).

Figure 3.1 shows that the market capitalization of bond markets in local currencies has increased significantly in Malaysia and Thailand since the mid-2000s. Less progress was made in Indonesia, the Philippines, and Singapore. Figure 3.2 shows that private debt dominates local currency bonds in Malaysia and Thailand, whereas public debt prevails in Indonesia, the Philippines, and Singapore.

Figure 3.1.
Outstanding Debt in Local Currency

(Percent of GDP)

Source: World Bank, Global Financial Development Database.

Figure 3.2.
Outstanding Debt in Local Currency, 2011

(Percent of GDP)

Source: World Bank, Global Financial Development Database.

Nonfinancial Corporate Sector Restructuring

Corporate sector restructuring and reform were essential to the recovery of most ASEAN-5 countries after the Asian financial crisis. Many firms in financial distress were not viable and were liquidated, allowing resources to be reallocated to more productive uses. Some other firms in financial distress were viable and got some debt or operational restructuring to start hiring and investing again. Although the formal bankruptcy regime was the natural vehicle with which to support the corporate restructuring process, it became clear, given the extent and magnitude of financial distress, that additional government intervention would be necessary to jump-start and sustain the restructuring process.

Governments established out-of-court frameworks to facilitate corporate restructuring. Greater reliance on out-of-court debt workouts was a speedy, cost-effective, and market-friendly alternative to court-supervised workouts. Formal bankruptcy regimes suffered from poor creditor rights and an inefficient judicial system that hindered in-court restructuring and out-of-court deals: a credible threat from the bankruptcy system was necessary to make out-of-court deals effective. Indonesia, Malaysia, and Thailand upgraded their bankruptcy laws following the Asian financial crisis and took measures to strengthen their judicial systems to support restructuring. The Jakarta Initiative Task Force (JITF) in Indonesia, the Corporate Debt Restructuring Committee (CDRC) in Malaysia, and the Corporate Debt Restructuring Advisory Committee (CDRAC) in Thailand were the government-created coordinating bodies for promoting out-of-court restructuring. Claessens 2005 documents the CDRC’s resolution of 77 percent of the distressed debt it managed by 2003, compared with the JITF and the CDRAC, which resolved 56 percent and 48 percent, respectively.

Governments also intervened more directly to support corporate restructuring by establishing centralized asset management companies. The Indonesian Bank Restructuring Agency, Danaharta (for Malaysia), and the Thai Asset Management Corporation took over most nonperforming loans a few years after the Asian financial crisis. In principle, asset management companies were expected to play a key role in the restructuring process given their relatively large bargaining power. However, in practice, their contribution was somewhat disappointing because they were slow in resolving distressed debt (Claessens 2005). Political interference and other institutional weaknesses limited their effectiveness.

Financial System Structures: Where do they Stand Now?

The major reforms introduced after the Asian financial crisis paid off by increasing the resilience of financial systems in the ASEAN-5. To describe and compare ASEAN-5 financial system structures, this section focuses on three key dimensions: (1) financial depth, the size of financial institutions and markets; (2) access, the degree to which individuals and nonfinancial firms can use financial institutions and markets; and (3) efficiency, the ability of the financial system to provide financial services at the lowest cost. This section also zooms in on other prominent structural issues raised in IMF Financial System Stability Assessment reports that are characteristic of financial systems in ASEAN-5 countries. First, in many countries, financial conglomerates—groups of companies under common control that provide significant services in at least two different financial segments (banking and insurance, for instance)—have a large presence. Second, in most countries, governments tend to have a large influence in the financial sector beyond regulation.

Financial Depth

The most common way to characterize financial depth is by the size of financial institutions and financial markets. Financial institutions are central banks, commercial banks, insurance companies, pension funds, public financial institutions, and other financial institutions. Financial markets are bond (sovereign and corporate) and stock markets.

Figure 3.3 shows deposit money banks’ assets as a percentage of GDP. Malaysia, Singapore, and Thailand have much larger banking systems than Indonesia and the Philippines. In Malaysia, Singapore, and Thailand, banks’ assets were well above the average for high-income countries in 2015. In contrast, banks’ assets in Indonesia and the Philippines were less than the average for middle-income countries. Banking system size increased significantly during 1989–2014 in the Philippines, Singapore, and Thailand. In contrast, it remained almost unchanged in Indonesia and Malaysia.

Figure 3.3.
Deposit Money Banks’ Assets

(Percent of GDP)

Source: World Bank, Global Financial Development Database.

Data availability and comparability for nonbank financial institutions is much more limited than for deposit money banks. However, insurance companies and pension funds are usually important players within the universe of nonbank financial institutions for which there are comparable statistics. Figure 3.4 shows that insurance company assets in Malaysia, Singapore, and Thailand were larger than the average for high-income countries in 2011, suggesting that insurance markets are well developed. Insurance markets in Indonesia and the Philippines are smaller than in the other ASEAN-5 countries but larger than the average for middle-income countries. Figure 3.4 also shows that pension fund assets are remarkably large in Malaysia and much more modest in Indonesia, the Philippines, and Thailand.

Figure 3.4.
Insurance and Pension Fund Assets, 2011

(Percent of GDP)

Source: World Bank, Global Financial Development Database.

Financial systems in ASEAN-5 countries are still dominated by banks, but shadow banks are gaining ground. Shadow banks comprise a mix of institutions (Box 3.2). In Indonesia, banks accounted for 62 percent of financial institution assets in 2015, and in Singapore they accounted for 66 percent (Figure 3.5). The share of shadow banks in financial institution assets increased to 9 percent from 5 percent during 2005–15 in Indonesia and to 10 percent from 4 percent in Singapore (Figure 3.5).

Figure 3.5.
Composition of Financial Institution Assets


Source: Financial Stability Board, Global Shadow Banking Monitoring Report 2016 Dataset.

In financial markets the size of stock markets is measured by computing their capitalization (that is, the value of listed firms times the number of shares). The size of stock markets has increased sharply in most ASEAN-5 countries since 2000 (Figure 3.6). Yet stock market size varies even more than the size of deposit money banks. In all ASEAN-5 countries except Indonesia, stock markets were larger in 2015 than the average market in high-income countries. In Malaysia, the relatively large market in 2015 was still smaller than in the years before the Asian financial crisis.

Figure 3.6.
Stock Market Capitalization

(Percent of GDP)

Source: World Bank, Global Financial Development Database.

Shadow Banks: What Are They?

The Financial Stability Board has been carefully monitoring nonbank financial institutions to assess global trends and risks in the shadow banking system since 2011. The annual monitoring exercise relies on a common methodology for measuring nonbank financial institutions and covers 28 countries, including Indonesia and Singapore. It distinguishes between the following financial institutions: central banks, banks, insurance corporations, pension funds, public financial institutions, and other financial institutions.

The Financial Stability Board considers “other financial institutions” to be a conservative proxy for or broad measure of shadow banks. These include money market funds, hedge funds, other investment funds, real estate trusts, trust companies, finance companies, broker-dealers, structured finance vehicles, central counterparties, and captive financial institutions and money lenders. The Financial Stability Board also estimates a narrow measure of shadow banks focused on activities that pose higher financial stability risks.

The relative importance of financial markets compared with financial institutions in the financial system has been rising. Demirgüç-Kunt, Feyen, and Levine (2011) show that as economies develop, they tend to demand the services of financial markets more than those of banks. Figures 3.3 and 3.6 show that the size of stock markets relative to that of the banking system increased in all countries over the past 25 years.


Access to financial services is a key element for inclusive financial systems that aim to promote growth and reduce inequality. Financial services help households smooth consumption and invest in education and health. Credit allows businesses to invest, hire, and grow. An account at a financial institution is the first step toward financial inclusion. Figure 3.7 shows that almost all the population in Singapore has an account at a formal financial institution, in line with the patterns observed in high-income countries. Account ownership in Malaysia and Thailand is well above the average for middle-income countries. In contrast, it is relatively low in Indonesia and especially low in the Philippines.

Figure 3.7.
Account Owned at a Financial Institution, 2014

(Percent of population ages 15 and older)

Source: World Bank, Global Financial Development Database.

Demirgüç-Kunt and Klapper (2012) write that surveys point to several factors discouraging financial institution accounts that are relevant for middle- and low-income countries. These include having no money with which to open an account, the cost of opening an account, the documentation requirements for opening an account, the cost of maintaining an account (for example, annual fees), and distance from the bank (especially in rural areas).

To estimate access to stock and bond markets, measures of market concentration are typically used (Figure 3.8). For stock markets, the percentage of market capitalization outside of the 10 largest companies should increase when there is greater access by smaller firms. In ASEAN-5 countries, except Indonesia, access to stock markets is higher than the average in high-income and middle-income countries. For bond markets, the percentage of nonfinancial corporate bonds to total bonds outstanding is a measure of access that should increase with greater access (Figure 3.2). Access by corporations to bond markets in Indonesia and the Philippines remains low.


An efficient financial system performs its intermediation functions in the least costly way possible. A common measure of efficiency of banks is the net interest margin, defined as the accounting value of bank interest revenue net of interest expense, as a percentage of interest-earning assets. The purpose of net interest margins is to compensate banks for overhead costs, loan loss provisions, reserve requirements, and taxes on profits. In Malaysia and Singapore net interest margins are lower than the average for high-income countries (Figure 3.9). In Thailand they are lower than in the Philippines, and in both countries they are lower than the average for middle-income countries.

Figure 3.9.
Net Interest Margin, 2015


Source: World Bank, Global Financial Development Database.

Figure 3.8.
Market Capitalization outside of Top 10 Largest Companies, 2015

(Percent of total market capitalization)

Source: World Bank, Global Financial Development Database.

The stock market turnover ratio gauges financial market efficiency.4 Thailand leads in financial market efficiency (Figure 3.10). Intuitively, the turnover ratio measures the liquidity of the stock market. Stock markets are significantly more liquid in Thailand than in the other ASEAN-5 countries and than the average for high-income countries.

Figure 3.10.
Turnover Ratio, 2015


Source: World Bank, Global Financial Development Database.

The Presence of Conglomerates

The presence of financial conglomerates is a key feature in several countries. Because of their economic reach and their mix of regulated and unregulated activities, financial conglomerates pose a challenge to effective financial oversight. For example,

  • In Indonesia, 49 financial conglomerates account for 70 percent of the total assets of financial institutions. Bank-led conglomerates hold more than 90 percent of financial conglomerate assets and include insurance companies, securities firms, and finance companies. More than half of financial conglomerates have a horizontal structure with an unregulated holding company that controls the group. The absence of a regulated entity that leads the remaining entities in the financial conglomerate is a major challenge for consolidated supervision.

  • In Malaysia, the central bank enhanced its oversight to financial groups. The central bank holds a licensed institution, or a financial holding company that is the apex of the financial group, responsible for ensuring compliance with group-wide prudential standards. The apex entity will also serve as a focal point for supervisory activities such as obtaining information for the purposes of assessing risks to the financial health of the group.

  • In the Philippines, financial conglomerates own companies in telecommunications, energy, property, retail trade, and banking. About 60 percent of bank assets are controlled by banks belonging to conglomerates (7 of the 10 largest banks belong to conglomerates). Moreover, about 75 percent of total stock market capitalization comes from companies that belong to conglomerates. The interconnection within each conglomerate exposes banks to problems in the subsidiaries.

  • Thailand is home to large banking conglomerates, with significant ownership of nonbank financial institutions and considerable market share. The Bank of Thailand exercises consolidated financial supervision, but its regulatory perimeter extends only to banks.

Government Presence5

Extensive government ownership in the banking sector is another remarkable feature in ASEAN-5 financial systems. Government ownership is explained in part by the bailouts and takeovers in the aftermath of the Asian financial crisis. This dual role of owner and regulator generates conflicts of interest that can complicate effective oversight. It can also undermine crisis management and resolution.

  • In Indonesia, Bank Mandiri, which is 60 percent state owned, is the country’s largest bank, accounting for about 15 percent of total banking sector assets in 2015. It came about through a merger of four failed banks. Bank Rakyat Indonesia, the second-largest bank, specializing in small-scale borrowing and microfinance, is also majority state owned, accounting for 14 percent of total bank assets. Bank Negara Indonesia is the fourth-largest bank; it was recapitalized by the government during the Asian financial crisis and is 60 percent state owned, accounting for 8 percent of total bank assets.

  • In Malaysia, the government owns a significant share of the financial sector via its seven government-linked investment companies. These companies are subject to government oversight and participation on their boards, usually by appointees of the Ministry of Finance or the prime minister’s office. Government-linked investment companies control a large number of government-linked companies—commercial companies the government controls directly.

  • In the Philippines, the two major state-owned lenders, the Development Bank of the Philippines and the Land Bank of the Philippines, are among the 10 largest banks as measured by assets. The United Coconut Planters Bank is also a large state-owned bank. The Development Bank of the Philippines, Land Bank of the Philippines, Government Service Insurance System, and Social Security System were the four government financial institutions that funded an ambitious public-private partnership program aiming to revamp infrastructure.

  • In Singapore, the government share in the financial system is small.

  • In Thailand, the government has a significant equity stake in the commercial banking sector. During the 1997 financial crisis the government had to rescue several banks. Since then, the government has been reducing its stake, but it still controls Krung Thai Bank, the third-largest bank as measured by assets. Specialized financial institutions are policy banks fully owned by the government; they account for about 30 percent of financial system assets. The largest are the Government Savings Bank and the Bank for Agriculture and Agriculture Cooperatives—both deposit-taking institutions. The Bank of Thailand has been granted supervisory powers related to specialized financial institutions since 2015, which help mitigate concerns about conflict of interest.

Financial Stability

Financial stability means that the financial system can smoothly deliver the financial services it provides and is also resilient to shocks. Financial systems provide essential services such as taking deposits and investments for savers, loans and securities for investors, liquidity and payment services for both, and risk-diversification and insurance services. Financial instability impedes some (or all) of these key services.

Macroprudential surveillance is a key element of the analytical framework for assessing financial stability. It focuses on the financial system as a whole and complements the micro surveillance of individual financial institutions by supervisors. Some well-known quantitative analytical tools for macroprudential surveillance are analysis of z-scores, monitoring of financial soundness indicators, and stress testing. The analysis of macro-financial linkages is another important element of the analytical framework for assessing financial stability. Such analysis aims to assess the effect of various shocks on macroeconomic conditions through the financial system. Historical evidence, including in the ASEAN-5 as shown in Chapter 4, suggests that financial systems can amplify the effects of shocks on the economy. The Country Financial Stability Maps developed by Cervantes and others (2014) are a relatively novel quantitative tool used for the analysis of macro-financial linkages.

This section analyzes z-scores, examines financial soundness indicators, discusses financial stability maps, and assesses stock market volatility to shed some light on financial stability in ASEAN-5 countries.


To measure the degree of stability of financial institutions, Cihak and others (2012) aggregate individual financial institutions’ stability measures (z-scores) to get a system-wide measure by weighting each individual z-score by the financial institution’s size. A higher z-score implies a lower probability of insolvency and hence higher financial stability. Z-scores in Malaysia, the Philippines, and Singapore have been generally higher than the average for high-income and middle-income countries (Figure 3.11). Z-scores in most countries declined in 2008, at the outset of the global financial crisis. Z-scores in Indonesia and Thailand are below average for middle-income countries, but have been consistently improving since the mid-2000s.

Figure 3.11.

Source: World Bank, Global Financial Development Database.

The z-score is defined as z = (k + μ)/σ, in which k is equity capital as a percentage of assets, μ is return as a percentage of assets, and μ is standard deviation of the return on assets. It can be shown, with a little algebra, that z-scores are inversely related to the probability of a financial institution becoming insolvent. (There are two limitations that should be kept in mind when interpreting z-scores. First, they are computed from accounting data. Hence, if financial institutions can smooth out reported data, the z-score may underestimate the risk of insolvency. Second, z-scores neglect the interconnectedness of financial institutions in the sense that the probability of insolvency of a financial institution is likely to be higher when the rest of the financial institutions have a higher probability of insolvency.)

Financial Soundness Indicators

Financial soundness indicators are indicators of the current financial health of a country’s financial institutions. Financial soundness indicators aggregate individual financial institutions’ indicators (microprudential indicators) into financial soundness indicators (macroprudential indicators). The deposit-to-loan ratio, share of foreign exchange loans in total loans, and share of foreign exchange liabilities in total liabilities provide information on structural risks in the bank’s balance sheet to exchange rate fluctuations and to shifts in market confidence. The leverage ratio, given by equity divided by assets, measures whether the banking system has a large enough capital buffer to absorb negative shocks (for example, losses). The leverage ratio will come under pressure if the nonperforming loan ratio is growing or if the sector is experiencing losses.

The financial soundness indicators heat map suggests that balance sheets are strong in all countries (Table 3.1). The blue indicators in Singapore are explained by the relatively large share of foreign exchange loans in total loans (and more recently, by some deterioration in asset quality). Given Singapore’s position as a large international center, and the abundant funding sources in foreign exchange for banks, the large share of foreign exchange loans may not be a useful metric for comparison with the other ASEAN-5 emerging markets.

Table 3.1.Balance Sheet Soundness
Source: IMF staff estimates.Note: Indicators are red (high, H) if the upper threshold is breached, blue (medium, M) if the indicator is between the lower and the upper thresholds, and green (low, L) if the indicator is below the lower thresholds. The thresholds are based on analyses in various issues of the IMF Global Financial Stability Report and on the Basel III leverage ratio; they are also informed by IMF experiences in Financial Sector Assessment Programs. n.a. = not available.

Macro-Financial Linkages

Country Financial Stability Maps identify potential sources of macro-financial risks for a specific country. They also enable assessment of these risks in a global context through comparisons with the corresponding Global Financial Stability Map from the IMF’s Global Financial Stability Report.

By and large, macro-financial risks in the ASEAN-5 have receded since the global financial crisis. Figure 3.12 shows that macroeconomic, spillover, and credit risks for ASEAN-5 countries in 2017 were lower than in the immediate aftermath of the global crisis. Risk appetite has also returned to the region, and has been higher recently than it was during the global financial crisis. However, in two dimensions, risks appear higher now than during the crisis. Market and liquidity risks have increased since the global financial crisis because in several countries credit has grown much more than deposits. This imbalance implies that the deposit-to-loan ratio, a standard metric for assessing liquidity, has been declining. Monetary and financial conditions have tightened because broad money and credit, key indicators with which to assess monetary and financial conditions, were growing more slowly in the first quarter of 2017 than in the aftermath of the global financial crisis.

Figure 3.12.
ASEAN-5 Financial Stability Map, 2017 versus 2009

Source: IMF staff estimates.

Moreover, the ASEAN-5 Country Financial Stability Map currently lies within the Global Financial Stability Map, which suggests lower vulnerability in the ASEAN-5 than in the global financial system. Figure 3.13 shows that macroeconomic, spillover, and credit risks for ASEAN-5 countries in the first quarter of 2017 were lower than in the Global Financial Stability Map, and risk appetite was relatively higher. However, monetary and financial conditions in the ASEAN-5 were tighter compared with global conditions and have been since the first quarter of 2015.

Figure 3.13.
ASEAN-5 Financial Stability Map 2017 versus Global, 2017

Source: IMF staff estimates.

The Country Financial Stability Map captures four macro-financial risk categories (macroeconomic, inward spillovers, credit, market and liquidity) and two macro-financial conditions categories (monetary and financial conditions, risk appetite). Each category relies on several indicators, as discussed in Cervantes and others 2014. Each category is ranked from 0 to 10. A rank of 0 captures the lowest risk, the highest risk aversion, and the tightest monetary and financial conditions. A rank of 5 corresponds to long-term average risks and conditions in a five-year period.

Financial Market Volatility

One way to measure instability of financial markets is by the volatility of daily returns of the stock market index over a year (Figure 3.14). Stock market volatility has been declining in all ASEAN-5 countries since the global financial crisis, making stock markets more attractive for investors. Financial markets tend to be relatively more stable in Malaysia and, more recently, in Singapore.

Figure 3.14.
Stock Price Volatility Index

(Standard deviation of the daily return of the stock market each year)

Source: World Bank, Global Financial Development Database.

Toward a Resilient Financial System

ASEAN-5 countries overhauled the regulation and supervision of their financial systems in response to the Asian financial crisis. They also repaired balance sheets by restructuring not only the financial sector but also nonfinancial corporations. Finally, they actively developed bond markets in local currency to diversify the sources of funding for the real economy. All these efforts helped them navigate the global financial crisis and preserve their financial stability.

Currently, the size, composition, access, efficiency, and institutional structure of regulation and supervision are diverse in the financial systems in ASEAN-5 countries. To some extent these disparities reflect stages in economic development within the group of countries. Singapore, for example, is a high-income country and has a larger, more diversified, more efficient, and more extended financial system than the rest of the countries.

But financial systems in ASEAN-5 countries also have some important similarities, including the dominant role of banks, the increasing importance of shadow banks and financial markets, the large presence of financial conglomerates, and high participation of the government in financial systems.

A bird’s-eye view of financial stability risks in ASEAN-5 countries suggests that they are contained. Z-scores are either relatively high or have been on an upward trend. Financial soundness indicators indicate that balance sheets are relatively strong, with few liquidity and solvency risks. Finally, macro-financial risks are generally lower in the ASEAN-5 financial system than in the global financial system.


    Cervantes, R.,P.Jeasakul,J.Maloney, andL. L.Ong. 2014. “Ms. Muffet, Spidergram and the Web of Macro-Financial Linkages.” IMF Working Paper 14/99, International Monetary Fund, Washington, DC.

    Cihak, M.,A.Demirgüç-Kunt,E.Feyen, andR.Levine. 2012. “Benchmarking Financial Systems around the World.” World Bank Policy Research Working Paper 6175, World Bank, Washington, DC.

    Cihak, M., andR.Podpiera. 2006. “Is One Watchdog Better than Three? International Experience with Integrated Financial Sector Supervision.” IMF Working Paper 06/57, International Monetary Fund, Washington, DC.

    Claessens, S.2005. “Policy Approaches to Corporate Restructuring around the World: What Worked, What Failed?” In Corporate Restructuring: Lessons from Experience, edited by M.Pomerleano andW.Shaw. Washington, DC: World Bank.

    Demirgüç-Kunt, A.,E.Feyen, andR.Levine. 2011. “The Evolving Importance of Banks and Securities Markets.” World Bank Policy Research Working Paper 5805, World Bank, Washington, DC.

    Demirgüç-Kunt, A., andL.Klapper. 2012. “Measuring Financial Inclusion: The Global Findex Database.” World Bank Policy Research Working Paper 6025, World Bank, Washington, DC.

    Felman, J.,S.Gray,M.Goswami,A.Jobst,M.Pradhan,S.Peiris, andD.Seneviratne. 2011. “ASEAN-5 Bond Market Development: Where Does It Stand? Where Is It Going?IMF Working Paper 11/137, International Monetary Fund, Washington, DC.

    Financial Stability Board (FSB). 2017. “Global Shadow Banking Monitoring Report 2016.” Basel.

    International Monetary Fund (IMF). 2009. “Thailand: Financial Sector Stability Assessment.” IMF Country Report 09/147, Washington, DC.

    International Monetary Fund (IMF). 2010. “Philippines: Financial Sector Stability Assessment Update.” IMF Country Report 10/90, Washington, DC.

    International Monetary Fund (IMF). 2013a. “Malaysia: Financial Sector Stability Assessment.” IMF Country Report 13/52, Washington, DC.

    International Monetary Fund (IMF). 2013b. “Singapore: Financial Sector Stability Assessment.” IMF Country Report 13/325, Washington, DC.

    International Monetary Fund (IMF). 2017. Indonesia: Financial Sector Stability Assessment.” IMF Country Report 17/152, Washington, DC.

    Laeven, L., andF.Valencia. 2008. “Systemic Banking Crisis Database: An Update.” IMF Working Paper 12/163, International Monetary Fund, Washington, DC.

    International Monetary Fund (IMF). 2012. “Systemic Banking Crisis: A New Database.” IMF Working Paper 08/224, International Monetary Fund, Washington, DC.

    Lindgren, C.,T.Balino,C.Enoch,A. M.Gulde,M.Quintyn, andL.Teo. 1999. “Financial Sector Crisis and Restructuring: Lessons from Asia.” IMF Occasional Paper 188, International Monetary Fund, Washington, DC.

    Melecky, M., andA.Podpiera. 2013. “Institutional Structures for Financial Sector Supervision, Their Drivers and Historical Benchmarks.” Journal of Financial Stability9 (3) 42844.

These systemic banking crisis episodes are described in Laeven and Valencia (2012).

Laeven and Valencia (2008) discuss the impact of the Asian financial crisis in Indonesia, Malaysia, the Philippines, and Thailand. The statistics mentioned in the paragraph come from Table 1 in that paper.

Lindgren and others (1999) describe in detail the weaknesses in regulation and supervision of financial systems before the Asian financial crisis and the institutional reforms the crisis triggered.

The stock market turnover ratio is the total value of shares traded during a period divided by the market capitalization in that period.

This section draws on several IMF Financial System Stability Assessment reports (IMF 2009, 2010, 2013a, 2013b, 2017).

    Other Resources Citing This Publication