Box 8

MIXED PERFORMANCE OF ASIAN DOLLAR MARKET

Since the Asian Crisis, the ADM has declined both in balance sheet size and the number of players. Total assets were US$491.6 billion at end 2002, down from a high of US$557.2 billion at end 1997. (See Chart A.) The total number of Asian Currency Units, meanwhile, fell from 227 to 164 because of the pullout of some players and consolidation in the financial industry.1 The decline in total assets was due largely to
the non-bank loans segment, which has more than halved in size since end 1997. (See Chart B.)

However, interbank lending has been sustained and this has helped to support the ADM and offset the fall in non-bank loans. (See Chart C.) In recent years, most of these interbank loans were directed to Europe to fund merger and acquisition activities and telecommunications expansion. (See Chart D.) Europe now holds the largest share of interbank loans by destination.

Compared with other international banking centres, growth in external assets of the ADM has been lacklustre since 1997 because of the weak regional environment, scaling down of Japanese banks' foreign operations and, more recently, the global economic slowdown. (See Chart E.)

The decline in ADM assets is due to several factors:
- A fall in regional demand for loans.
- Restrictions on or barriers to foreign currency borrowing in regional countries.
- General caution amongst banks in extending their balance sheets.
- Bank consolidation.
- Withdrawal of funds by the Japanese banks.

Loans to East Asia (ex Japan) have halved since 1997, while non-bank loans to Japan, which were largely intermediated by Japanese banks, have been shrinking since 1995. (See Charts F and G.)

Japanese banks are no longer active players as before, while the presence of European banks (excluding UK) has grown in the ADM. From the flow of funds perspective, non-bank lending to Japan fell sharply, from 35.8% to 3.5% of the total. (See Charts H and I.) By destination, Europe now holds the largest share of the interbank loans segment. (See Charts J and K.)

Reflecting the decline in lending activities, holdings of securities and investments in banks’ balance sheets rose significantly although this remained relatively small as a share of total assets. Banks are also gradually growing their off-balance sheet activities such
as derivatives trading and fee-based business. On the liabilities side, total non-bank deposits grew 11.0% from US$113.7 billion at end 1997 to US$126.2 billion at end 2002.


With the weak global economic environment and the SARS outbreak, non-bank lending is likely to remain weak in 2003 and interbank lending will be the main source of market activity. In view of this loan environment, banks’ earnings are likely to continue to shift towards non-interest income sources.

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