The Asian Development Bank (ADB) has warned that central banks in Southeast Asia must be ready to support liquidity and set up safety nets to reduce the potential risks associated with financial digitization and cross-border banking. In a recent report, the ADB stated that while digitalized transactions have already proven to be a boon for the banking sector in the Association of Southeast Asian Nations, China, Japan, and South Korea (ASEAN+3), it is crucial for central banks to update their regulatory framework to address these potential risks.
The bank explained that while financial transactions are becoming increasingly global due to digitization, they are also becoming more complex with conflicting geographical and functional jurisdictions in cyberspace. The ADB emphasized the need for cross-border regulatory cooperation to build trust and confidence among peer regulators.
The ASEAN+3 region is unique in that, despite extensive intraregional economic linkages, member economies are at different stages of economic development and trade in their own currencies. Therefore, the ADB suggested that supervisory entities must be organized for efficient coordination and that central banks should focus on data standardization and collection to enable the use of advanced technology in financial supervision.
The ADB noted that the expansion of cross-border banking activities will create challenges for supervision and crisis management, which may result in liquidity mismanagement and trigger a banking group failure regionally. To prevent this, the bank recommended that home and host central banks in ASEAN+3 prepare their own cross-border, short-term liquidity measures, such as cross-border collateral arrangements and bilateral swap agreements, as part of regional financial safety nets.
The Bangko Sentral ng Pilipinas (BSP) has already signed a Memorandum of Understanding on Cooperation in Regional Payment Connectivity (RPC) with other ASEAN central banks to enhance collaboration in payment connectivity. The RPC agreement aims to create a more inclusive financial ecosystem through fast, seamless, and cost-effective cross-border payments across the region.
According to the ADB, the penetration rate of digital banking in the region approached 90% in 2021 in some economies, and digital wallets have become the dominant e-commerce payment platform, accounting for 68% of regional e-commerce transactions by value in 2021. The bank projects that this trend will continue to grow, with digital wallets projected to account for over 72% of e-commerce transactions by 2025.
In conclusion, the ADB emphasized the importance of creating a level playing field between incumbent banks and new companies, effectively using regtech and suptech for improved information-sharing, and preparing for potential risks associated with financial digitization and cross-border banking in the region. The BSP has already taken steps towards digitizing its processes with the deployment of the Advanced SupTech Engine for Risk-Based Compliance (ASTERisC*) among selected financial institutions.
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