Designing a New and Balanced Financial Market Structure in Post-Crisis Asia: Policy Recommendations for Strengthening Banking Industry and Developing Corporate Bond Markets Prepared by: Asian Policy Forum Asian Development Bank Institute (Forum Secretariat) Annual Meeting of Asian Development Bank, 8 May 2001, Hawaii, USA

Proposals for Strengthening Banking Industry and Developing Corporate Bond Markets (A) Banking Industry Enhancing Strength and Efficiency of Banking Industry: First Priority (B) Corporate Bond Market (i) Sequencing Capital Markets Development (ii) Providing Effective Benchmarking via Government Bond Market as Pre-condition for Developing Corporate Bond Markets (iii) Overcoming Factors Responsible for Underdevelopment of Corporate Bond Markets

(A)Enhancing Strength and Efficiency of Banking Industry(I): Proposal#1: Minimizing government interference and enhancing banks’ monitoring power ~avoid directed lending and bailing out of insolvent banks ~ensure independent regulatory and supervisory authorities from political pressure ~build up sufficient budgetary resources and highly paid skilled human capital ~Enhance banks’ position in the control change of industrial organizations to monitor large family businesses as borrowers, contributing to improving quality of banks assets. ~ Greater transparency on ownership, bank loans and investment

(A) Enhancing Strength and Efficiency of Banking Industry(II): Proposal#2: Strengthening prudential and supervisory regulations fitted to local conditions ~Enhancing CAMEL(Capital Adequacy, Assets Quality, Management Competence, Earnings and Liquidity) ~Introducing counter-cyclical prudential regulations ~Using liquidity as an early warning signal while monitoring cash flow impact of off-balance sheet liabilities ~ ensure asset quality by introducing rules to reduce connected lending due to concentrated ownership

(A) Enhancing Strength and Efficiency of Banking Industry (III): Proposal#3: Reviewing corporate structure of banks to avoid over-dominance of banks ~strengthen intermediate financial market structure by enhancing bank efficiency ~ to prevent dominant banks from becoming a prohibitory force to bond market development ~to identify an appropriate legal form for distinguishing banking businesses from securities businesses

(B) Sequencing Capital Markets Development (I): Proposal#4:Planning,prioritizing and pacing capital markets development (a) Establishing consensus on usefulness of bond markets amongst policy makers, governing authorities, market traders and investors (b) Establishing Government Bond market for effective yield curve benchmarking (c) Promoting primary market trading activities initially through statutory requirements on banks to hold bonds as liquid assets (d) Promoting secondary market trading activities via regulatory framework, fiscal incentives and educational programs

Sequencing Capital Markets Development (II): (e) Encourage corporate bond market activities with policies to boost supply and stimulate demand (f) Improving further bond markets infrastructure, transparency, objectivity from external and internal credit rating assessment (g) Establishing related financial markets to facilitate risk management strategies and further boost liquidity (h) gradually reduce statutory requirements and tax incentives once bond markets mature (i) Preparing for regional bond markets in light of constraints in local bond markets

Providing Effective Benchmarking via Government Bond Market as Precondition Proposal#5: Regular issuance regardless of budgetary balance, well-spaced maturities mix over longer-time horizon Proposal#6: Stimulating primary and secondary markets activities with basic clearing and settlement system set up Proposal#7: Initially, impose statutory requirements to facilitate trading of and tax incentives to promote investing in government bonds

Overcoming Factors Responsible for Underdevelopment of Corporate Bond Markets (I): Proposal#8: Encouraging demand for corporate bonds: Promote institutional and retail investors as well as banks with tax incentives during infancy period Proposal#9: Nurturing supply of corporate bonds:Establish related financial markets to facilitate risk management strategies Proposal#10: Drafting legal and regulatory framework pertaining to bond issuance

Overcoming Factors Responsible for Underdevelopment of Corporate Bond Markets (II): Proposal#11: Improving clearing and settlement systems to limit systemic risks Proposal#12: Encouraging transparency and objectivity from external and internal credit rating assessment Proposal#13: Preparing for regional bond markets with cost and benefit analysis due to limited size of local bond markets