By Rachel Armstrong
SINGAPORE, Feb 25 (Reuters) - Regulators in the United States and Europe have learned some hard lessons from the global financial crisis and should now look to Asia to see how many of their new tougher rules governing financial markets will work out.
A lot of regulations under consideration in the developed world to rein in the excessive risk-taking of banks blamed in part for the global financial crisis are already in place in Asia, which came through the crisis relatively unscathed.
The new buzzwords attached to western countries' regulatory proposals include macroprudential lending controls and counter-cyclical credit buffers, but these are tools most Asian financial centres adopted in the wake of the region's own financial crisis in 1997.
"In all sorts of areas, the Asian markets haven't had the same problems the U.S. and European markets had and that in part is because of some of the changes which were made 12 years ago after the Asia crisis," said Martin Wheatley, chief executive of Hong Kong's Securities and Futures Commission.
Asian-style regulation includes tougher capital standards for banks, lending controls such as limiting loan-to-value ratios for mortgages and caps on debt servicing.
In the buildup to the global crisis, there were no caps imposed by regulators in western Europe or the United States on loans for houses. Some banks even loaned out amounts that exceeded the value of the house in question.
In comparison, many Asian countries have upper limits for home loans. Hong Kong, for example, caps mortgages at a maximum of 70 percent of the value of the home and lower for more expensive properties.
TOUGHER RULES FOR WESTERN BANKS
The tough approach taken by Asian regulators in recent years to control domestic banks is likely to be extended to the regional operations of overseas banks, lawyers and former regulators said.
"Now, Asian regulators will no longer look at the famous western names as a Godsend, instead they'll see them as a potential liability and the upshot is they'll make sure they're treated as tough as local banks," said Simon Topping, former director of banking policy at the Hong Kong Monetary Authority and now a partner at accountancy firm KPMG.
Many European and U.S. banks are likely to look to growth in Asia to make up for the sluggish performance of developed economies.
The huge array of new rules and regulations dished out by their home regulators may, if nothing else, give hope they could get an easier ride in Asia.
Instead, banks with full-blown banking operations in Asia such as Standard Chartered and Citigroup could face higher capital requirements than in their home jurisdictions.
"The UK may say one of its banking groups needs to have an 11 percent capital base and try to impose that around the world, but if a host regulator thinks its subsidiary needs 12 or 13 percent, it'll say 12 or 13," said Topping.
International banks that currently operate in the region through branch networks may be forced by some regulators to set-up subsidiary companies instead so they can be subject to more intense supervision.
"The model of requiring foreign banks to become locally-incorporated subsidiaries will be debated more and more within Asia," said Thirachai Phuvanatnaranubala, secretary general of Thailand's Securities and Exchange Commission.
A MODEL FOR CHANGE
Although Asia's financial sector came through the global financial crisis largely unscathed, regulators can't take all the credit.
Many countries in the region lacked the complex financial instruments, securitisation and lending practices seen in the United States and Europe that triggered the crisis.
Simpler markets don't mean they can't offer valuable lessons.
The resilience of the globally interconnected financial centres such as Hong Kong and Singapore is in large part down to regulators' ability to balance a light touch on financial markets with a stronger one in the local banking system.
"These centres did a better job than the UK and U.S. at putting a separation between a tightly controlled and tightly supervised domestic banking system and their function as a global financial centre," said Nicolas Veron, a senior fellow at Brussels- based think tank Bruegel, which specialises in financial regulation.
"The UK in particular wasn't able to separate regulation of the City of London from the domestic banking system. They're now looking for a new model and should at least reflect on the systems in Hong Kong and Singapore," said Veron.
British policymakers are unlikely to explicitly adopt another country's regulatory model. But they have lured Wheatley back from Hong Kong's SFC to oversee the establishment of its new consumer and markets regulator.
Wheatley is British and has experience as deputy CEO at the London Stock Exchange. But his record in Hong Kong means he is one of the few regulators whose reputation has improved in the past three years.
He said it's far too early to say what major changes he'll try to implement when he moves back to London. But one of his first tasks may be to deal with the unintended consequences of the changes pushed through by overseas regulators, he said.
"There are some big, big decisions being made very quickly at the moment and that's inevitably going to create some market anomalies which we're going to have to correct," he said.
And this is the fear shared by many in Asia. For while many Asian countries are plagued by reams of red tape in some areas of regulation, their big-picture macroprudential policies are surprisingly simple.
The worry is that regulators in the United States and Europe may over react following the global financial crisis.
"I think re-regulation as it's happening in the West tends to create conditions for financial fragmentation and not financial integration, so the more you regulate systems the more barriers there will be to cross-border activity, and a less cohesive approach to deal with future problems," Veron said.
(Editing by Neil Fullick) ((email@example.com)(+65 68703835)(Reuters Messaging: firstname.lastname@example.org))
Keywords: FINANCE SUMMIT/REGULATION