Introduction

The global financial turmoil originating from the United States (US) subprime mortgage market is deepening and broadening. Banks in the US and the European Union (EU) are threatened with liquidity shortage and huge investment losses. Conversely, commercial banks in Asia have been relatively unscathed.

The impact of the financial turmoil on commercial banks in Asia can be seen in two aspects. First is the direct loss in investments. Subprime mortgage losses in Asia have totaled about US$19.5 billion, which accounts for approximately 1.95% of total capital in Asian banks; this is far lower than the 10.03% of total capital reported in the US (see Kawai, Lamberte, and Yang 2008).

Second is the change in capital structure and operating performance in Asian banks, which shows the indirect impact of the financial turmoil. The capital adequacy ratio (CAR) in Asian banks has maintained double-digit growth, except in the People's Republic of China (PRC). The nonperforming loans (NPL) ratio has trended downward, while the coverage ratio has trended upward. Additionally, the return on assets (ROA) and return on equity (ROE) in Asian banks continue to perform well (Table 1 [ PDF 81.9KB | 1 page ], Table 2 [ PDF 85.7KB | 1 page ], Table 3 [ PDF 85.7KB | 1 page ], Table 4 [ PDF 86.1KB | 1 page ], and Table 5 [ PDF 86.1KB | 1 page ]).

Why are Asian commercial banks less affected by the financial turmoil? This may be attributed to a series of financial supervisory system reforms implemented after the Asian Financial Crisis in 1997. The Asian financial crisis was caused by the sudden influx of global hot money and relatively fragile banking systems. From 1997 to 2003, Asian countries launched reforms in their financial supervisory systems. Among these reforms, the evolution of the financial supervisory structure in the PRC; Hong Kong, China; Singapore; and Taipei,China is most notable. Since the beginning of the decade, these four Asian economies have become an important global economic zone, owing to phenomenal economic growth. The savings rate of citizens in these economies is relatively higher than in other economies, which contributes to the development of the bank system. Financial markets in Singapore and Hong Kong, China are also highly globalized. Their financial supervisory systems therefore serve as useful reference for financial supervision reforms being implemented in the US and the EU.

This paper focuses on bank supervisory systems in the PRC; Hong Kong, China; Singapore; and Taipei,China, and analyzes how commercial banks have been influenced by the financial turmoil. This study uses financial indicators of banks' capital structure and operating performance during the period 2003–2008, to examine the role of an integrated financial regulatory structure in helping financial institutions mitigate the impact of the financial crisis.

Both Singapore and Taipei,China have integrated financial supervisory systems,while PRC and Hong Kong, China have adopted fragmented regulatory structures. The integrated financial supervisory system features a single universal regulator that conducts oversight and conduct-of-business regulation for all the financial services sectors. In contrast, the fragmented financial supervisory system is a legal-entity-driven approach. The legal status of financial institutions (for example, an entity registered as a bank, a security firm, or an insurance company) essentially determines their regulator, from the perspective of safety, soundness, and business conduct.¹

Is an integrated financial supervisory institution better than a fragmented regulatory structure? There is no definite answer to this question in the literature.² Based on bank supervisory systems in 133 countries from 1996 to 1999, Barth, Nolle, Phumiwasana, and Yago (2002) studied the relationship between different bank supervisory systems and bank structures and demonstrated that that there is no relationship between the two. Cihak and Podpiera (2007) argued that integration of the supervisory system is highly relevant in terms of acquiring high quality and consistent financial supervision. Due to the growing complexity of derivatives and financial markets, Masciandaro and Quintyn (2009) argued that a fragmented regulatory approach would not be appropriate, and that an integrated structure should be adopted for the purpose of ensuring sufficient information. However, the United Kingdom's integrated financial regulatory structure did not make it better equipped to deal with the impact of the current financial crisis, compared to the US and the EU; this suggests that an integrated financial regulatory structure may not be relevant to hedging financial risk. Our own findings reveal no tangible evidence that an integrated financial regulatory structure is better than a fragmented regulatory structure in mitigating the current financial turmoil. It is likely that this issue will be continuously explored.

Although the question of which financial regulatory structure would be optimal at the national level remains unanswered, global and regional cooperation in financial supervision should be strengthened to respond to the growing complexity and interdependence of global financial system. Due to differences in financial regulatory structures among Asian countries, this paper suggests that the current framework for Asian regional supervision coordination should refer to the Lamfalussy Process, an approach to the development of the financial service industry regulations used by the EU. Originally developed in March 2001, it is named after the chair of the EU advisory committee who created it, Alexandre Lamfalussy. It is composed of four levels, each focusing on a specific stage of rulemaking.

The remainder of this paper is organized as follows: Section 2 discusses the financial supervisory systems in PRC; Hong Kong, China; Singapore; and Taipei,China, focusing on bank supervision in these countries. Section 3 analyzes the impact of financial turmoil on the commercial banks in these economies, using financial data from 2003 to 2008. Section 4 discusses and analyzes financial regulatory reforms in the US and the EU, and provides suggestions for Asian cooperation on financial supervision. Section 5 concludes.

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