Bankers: Malaysia not shielded from contagion risk

KUALA LUMPUR: The idea that Malaysia is shielded from the contagion
risk arising from the distressed Western economies is a myth, according
to banking executives.
“The whole notion of Malaysia being insulated is something we need to be less sanguine about,” Hong Leong Bank
group chief risk officer (CRO) Justin Soong said during a panel
discussion at the Asian Strategy and Leadership Institute's Malaysian
Banking Summit.
Panellist Jeroen Thijs, CRO of Bank Islam Malaysia Bhd,
echoed this, saying a country could never truly mitigate contagion
risks, especially if it was plugged into the global economy.
“The
only country that might be isolated from such risks is North Korea, but
the rest are dependent on trade flows. If something goes wrong, some
macroeconomic factors in Malaysia could change and affect banks and
consumers here.
“I don't think you can mitigate or eliminate
contagion risk. The best a bank can do is to make sure it is
diversified across geographies, industries and instruments,” he said.
Nonetheless,
proper risk management systems were now entrenched in the local
financial services industry and part of “nearly every decision that
banks make,” according to RAM Ratings deputy CEO Promod Dass.
Thijs
said that prior to the Asian financial crisis, there was not much
emphasis on risk management in the country. “Now we see that our risk
management is on par with international standards, and sometimes even
better than some Western banks.”
Even with safeguards and systems in place, Dass said there was a need to engender a “risk culture” at all levels.
“Risk
management is about the people. It is not just the CRO's role, but goes
down to the officer that brings in the loan. The hardest thing for any
risk management team is to stand back and stay away from herd mentality
in the industry.” he said.
“While every bank in town is lending
to a particular sector or pursuing a fashionable product or merger or
acquisition, they must consider whether it is in their best interests
in the long run. The banks that survived the crisis were the ones which
were good at saying a firm no during the best of times.”
Meanwhile,
Thijs remarked that he was “baffled” by the continued reliance by banks
on risk models and projections, citing the example of
recently-disgraced US bank JP Morgan, which pioneered its use.
“We
have seen over and over again that these models don't work. They are
useful in normal times, but when stress breaks out, they are very
un-useful' as they create a false sense of security.”
On the other hand, he named Wells Fargo as a case study for how banks should behave during both boom and bust.
“In the good times, they adhered to strong underwriting practices, and were losing market share hand over fist.
“I
can assure you their shareholders were not happy. But they said, No, we
don't believe in loaning money to people who can't pay back'. Then the
crisis hit and they didn't go under. Now they have the firing power and
have acquired healthy assets from banks which needed to raise money.
“They
have the highest market share of mortgages in the United States
currently without ever having to compromise on their risk standards.”