Navigating today's banking "new normal" continues to be top of mind for businesses and policymakers—so much so, that I was recently asked to byline an article on the subject for Singapore’s Business Times. In the article, I identify three new realities of the new normal that we must wrap our heads around in order to better understand and manage new risks.
Many of you have said that you're unable to access this link, so I'm reposting my submission to Business Times below. I’m sharing this because we’d like to hear your thoughts on defining today's new normal, so I encourage you post a comment.
Navigating the new normal
By Dan McConaghy
Pick up a U.S. newspaper any day of the week, and one comes across tales of economic hardship. Stories abound of unemployed who, instead of enjoying a good holiday season with their family, will spend their time seeking help from agencies that offer holiday assistance. The economy is on the upswing, but pain is still felt.
Business sentiment in Asia Pacific tells a different story: ‘We need more talent’, employers are saying. The Ministry of Manpower in Singapore backs this cheer as the general jobless rate is dipping to 2.1 percent, the lowest in two-and-a-half years.
What we are witnessing is the rise of Asia Pacific as a growth epicenter. Economists predict Asian markets to be the new engine of global prosperity. Just five years ago, the mere thought that Asia would lead global growth and be the center of finance and technological innovation would have been inconceivable.
Ladies and gentlemen, we are officially in the ‘new normal’.
But what does this normal entail? At FICO, we are seeing three new realities that define this new normal. And as the new normal brings new risks, businesses and policymakers will need to understand the risk factors to manage them.
The first shift we see in this new normal is that credit will now be more expensive than before.
We saw that in the late 1990s to 2007, loans were relatively easy to attain and were granted somewhat recklessly to consumers in the U.S. and other markets. Similarly, in Asia in the recent past, we have seen a bout of easy credit that stemmed from various stimulus packages and quantitative easing during global financial crisis. This gave thrust to the buying spree on property we witnessed in Singapore, Hong Kong and China.
However, much to the credit of policymakers who have learnt lessons from the financial crisis, the property market is heading toward stabilization, thanks to numerous tightening policies that curbed the property bubble.
These deflationary steps have done well, but both banks and policymakers need to continue to monitor rapid growth. The sudden spurt of growth in the Asia Pacific region has given room to an open credit-granting environment, which has been partly responsible for the rapid rescue from the financial crisis.
But, with ease of credit often comes a relaxation in lending standards, something we must avoid. Lenders and policymakers must continue to promote responsible use of credit and lend only to healthy consumers and businesses.
While lenders aim to capitalize on this growth in emerging economies, they face a significant hurdle.
A world of stricter regulation – with potential for more to come – is the second new reality in this new normal. One high-profile example that is of particular interest to our banks is the recently released BASEL III framework.
Aside from increasing capital requirements, one of the most important components of the new framework is the introduction of a counter-cyclical capital buffer. The buffer is welcome because it addresses one of the main weaknesses of BASEL II — that it exacerbated cyclicality in economies.
With BASEL III, regulators have the flexibility to contain credit bubbles and reduce the likelihood of a repeat of the financial crisis.
This is especially relevant to countries like Singapore, where banks already are well capitalized but who need to hedge against potential future crises.
What banks need now, is to reinforce this new emphasis of counter-cyclicality an individual bank level, not just from a top-down regulatory perspective. Asian banks have an opportunity to lead in this respect.
To realize full business potential and be better able to forecast consumer behavior, banks will also need tools that can act as automatic stabilizers to complement the regulatory approach. This inclusion of counter-cyclical methodologies into the system right down to credit policy decisions at an individual customer level will ultimately make the banking system safer, more efficient and potentially more profitable.
This brings us to the third reality in the new normal.
We’ve all heard the phrase ‘too big to fail’, popularized by chatter surrounding bank bailouts and stimulus packages from governments around the world.
What that really means is organizations are too interconnected to fail.
As Western leaders are working to understand this interconnectedness, businesses and banks in Asia need to ensure they too, are working toward smarter and more connected decisions. The financial crisis has taught us that we need to understand the connections of all the micro-decisions made at an operational level, to full comprehend the total systemic risk, and act to sustainably heat or cool the economic situation.
Also, increased competition and less loyal consumers are forcing businesses to form deeper connections with their customers, which lends a greater sense of urgency to the need to take a truly holistic view of each individual customer relationship.
Asia Pacific is in a fortunate position, as we are at the epicenter of global economic recovery and we can learn from the lessons of other countries and “get it right” from the start. We’re not fighting with decades-long habits, processes and technologies like many Western countries.
Our position of leadership in the “new normal” can play to our advantage, as businesses in Asia continue to define and redefine our own path to global economic success.