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Governing Finance
A VOI.UME IN THE SERIES
Cornell Studies in Money
edited by Eric Helleiner and Jonathan Kirshner
A
East Asia's Adoption of
International Standards
list of titles in this series is available at www.ccrrnellpress.ccrrnell.edu.
Andrezv Walter
Cornell University Press
Ithaca and London
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Contents
Copyright C 2008 by Cornell University
All rights reserved. Except for brief quotations in a review,
this book, or parts thereof, must not be reproduced in any
form without permission in writing from the publisher. For
information, address Cornell University Press, Sage House,
51 2 East State Street, Ithaca, New York 1 4850.
First published 2008 by Cornell University Press
Printed in the United States of America
Library of Congress Cataloging-in-Publication Data
List of Figures
vii
Walter, Andrew.
List of Tables
ix
Governing finance: East Asia's adoption of international
standards I Andrew Walter.
p. cm. - (Cornell studies in money)
Includes bibliographical references and index.
institutions-Southeast Asia-State supervision.
institutions--Korea (South)-State supervision.
Korea (South)
2. Financial
3. Financial
4. Corporate
5. Corporate goverance
6. Accounting-Standards....o
....s utheast Asia.
7. Accounting-Standards--Korea (South)
II. Series.
I. Title.
HG18 7.A789W34 2008
and Financial Governance
1
1 . The Asian Crisis and the International Financial
Standards Project
8
2. A Theory of Compliance with I nternational Standards
29
3. Banking Supervision in Indonesia
50
4. Corporate Governance in Thailand
78
5. Banking Supervision and Corporate Governance
65 7'.83330218-dc22
in Malaysia
99
6. Banking Supervision, Corporate f'JOvernance,
20070 29235
Cornell University Press strives to use environmentally
responsible suppliers and materials to the fullest extent
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are recycled, totally chlorine-free, or partly composed of
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Cloth printing
Xl
Xlll
Introduction: International Standards
ISBN 978-0-801 4- 46 45-0 (cloth: alk. paper)
1 . International financial reporting standards.
governance-Southeast Asia.
Acknowledgments
Abbreviations
10 9 8
7 6 5
4 3
2 1
and Financial Disclosure in Korea
126
7. Practical and Theoretical Implications
166
Appendix: The Key International Standards and Codes
185
Notes
189
References
2 11
Index
227
Figures
Figure 1.1. Structural conditionalities in 1MF programs,
Indonesia, Korea, and Thailand: 1997-2000
19
Figure 2.1. Four stages of compliance and compliance failure
32
Figure 2.2. Effects of crises on compliance (international
standards with high monitoring and private sector
compliance costs)
44
Figure 2.3. Pro-compliance pressure and domestic compliance
costs favor mock compliance outcomes
47
Figure 2.4. Private sector compliance costs and third party
monitoring costs by standard
48
Figure 3.1. Indonesian banks: CARs and NPLs, 1997-2005
65
Figure 5. 1. Malaysia: CARs and NPLs, 1997-2005
106
Figure 6. 1. Korean domestic commercial banks: Average CARs
and NPLs, official estimates, 1992-2005
131
Figure 6.2. Korean banks: Return on equity 1993-2004
138
Figure 6.3. Korean banks: Provisions on substandard and below
loans (SBLs) as % of total SBLs, 1999-2002
139
Figure 6.4. Korean banks: Large exposure ratio, 2000-2005
141
Tables
Table 1.1. SDDS subscription, posting, and compliance dates,
selected countries and groups
4
Table 1.1. Financial stability forum: Twelve key standards for
sound financial systems
9
Table 1.2. FSSA and ROSC modules completed (published
and unpublished) as of I July 2004, major emerging
market countries
13
Table 1.3. Country membership of selected international
organizations (2002)
26
Table 3.1. Banking regulation-related conditionalities in
Indonesia's IMF programs
53
Table 3.2. IMF assessment of Indonesia's BCP compliance,
September 2002
57
Table 3.3. Classifications of Indonesian bank inspections, 1998-99
63
Table 3.4. Indonesian asset classification and provisioning
standards, post-crisis
64
Table 3.5. Official capital and NPL ratios, major Indonesian banks,
first quart�r 2002
66
Table 4.1. Selected corporate governance rules, T hailand,
and Asian best practice, 2003-4
82
x
Tables
Table 4.2. CLSA summary corporate governance scores, Asia 2002
91
Table 5.1. Selected corporate governance rules. Malaysia,
and Asian best practice, 2003-4
1 12
Table 6.1. Asset classification standards and provisioning
requirements for Korean banks
137
Table 6.2. Revised Korean credit ceiling regulations
140
Table 6.3. Major Korean companies: Selected areas of formal
lAS compliance, 2003 financial statements
156
Table 6.4. Major Korean banks: Scores on BCBS 1999 sound
financial disclosure standards
159
Table 7.1. Substantive compliance, circa 2005
169
Acknowledgments
T hanks are due to various individuals and institutions who assisted in
the research and preparation of this study: the staff at the Institute of De
fence and Strategic Studies at NTU in Singapore where I spent a very enjoy
able year as a visiting fellow, and Barry Desker and Yuen Foong Khong for
encouraging me to apply for a fellowship there and for supporting my re
search; Yeeming Chong for her friendly and efficient assistance; the LSE
for granting me a year's leave to conduct initial research over 2001-2; the
Korea Foundation for inviting me to Korea in summer 2000 and for arrang
ing a series of interviews; the Japan Foundation Endowment Committee for
funding a research trip to Tokyo in 2002; my former and current research
students, including Yong-Ki Kim, Thitinan Pongsudhirak, Wang-Hwi Lee,
and Hyoung-kyu Chey, who helped to organize interviews in some countries
and who responded to various requests for information; Hogi Hyun for
his assistance and hospitality in various parts of the world; Leonard Sebas
tian and Devi Santi for helping to arrange interviews in Jakarta; Michael
Wood for introductions in Asia; Jean-Fram,:ois Drolet and Oskar Tetzlaff for
data collection; Vanessa West for editing the bibliography; Paula Durbin
Westby for preparing the index; and finally to the many interviewees in
different countries who generously provided information and often further
assistance to this project. Mark T hatcher made helpful comments upon the
general argument and parts of the manuscript. T hitinan Pongsudhirak and
Kheamasuda Reongvan both gave helpful comments on the Thailand chap
ter. Two anonymous reviewers provided extensive and constructive com
ments on the whole manuscript, prompting a fundamental restructuring
and many alterations to details. Roger Haydon and the series editors at
xii
Acknowledgments
Cornell provided a generous mixture of advice and encouragement at cru
cial points. TeresaJesionowski aud Herman Rapaport both provided many
helpful suggestions on how to improve the final product. None of the above
is in any way responsible for remaining errors. T his book is dedicated to
Nina and our wonderful children, Lara and Ben, and to my parents.
A.W.
Abbreviations
ADB
Asian Development Bank
ADR
American Depository Receipt
AMF
Asian Monetary Fund
APEC
Asia-Pacific Economic Cooperation
BAFIA
Banking and Financial Institutions Act (Malaysia)
BC...BS
Basle Committee on Banking Supervision
BCP
Basle Core Principles for Banking Supervision
BFSR
Bank Financial Strength Ratings (Moody's Investor Services)
BIS
Bank for International Settlements
BI
Bank Indonesia
BNM
Bank Negara Malaysia
BOK
Bank of Korea
BOT
Bank of Thailand
CAMELS
Capital adequacy, Asset quality, Management, Earnings, Liquidity,
CAR
Capital Adequacy Ratio
and Sensitivity
CCL
Contingent Credit Line (IMF)
CCS
Comprehensive Consolidated Supervision
CEO
Chief Executive Officer
CPSS
Committee on Payments and Settlements Systems
CDRC
Corporate Debt Restructuring Committee (Malaysia)
DCF
Discounted Cash Flow
DPM
Deputy Prime Minister
DR
Depository Receipt
DSBB
Dissemination Standards Bulletin Board (IMF)
DTA
Deferred Tax Asset
xiv
Abbreviations
EMEPG
EPB
EPF
ESOP
FATF
FDI
FDIC
FIDF
FHC
FLC
FSA
FSAP
FSC
FSF
FSLIC
FSS
FSSA
FY
G7
GIO
G20
G22
GAAP
GATT
GODS
GLC
GOI
IAIS
lAS
lASB
IBRA
ICGN
IFAC
IFIs
IFRS
IMF
IMFC
100
IOSCO
KASB
KCCG
KDB
KDIC
Emerging Market Eminent Persons Group
Economic Planning Board (Korea)
Employees Provident Fund (Malaysia)
Employee Share Ownership Program
Financial Action Task Force
Foreign Direct Investment
Federal Deposit Insurance Corporation (United States)
Financial Institutions Development Fund (Thailand)
Financial Holding Company
Forward-Looking Criteria
Financial Services Authority (United Kingdom); Financial Services/
Supervisory Agency (japan)
Financial Sector Assessment Program
Financial Supen'1sory Commission (Korea)
Financial Stability Forum
Federal Savings and Loans Insurance Corporation (United States)
Financial Supervisory Service (Korea)
Financial System Stability Assessment
Financial Year
Group of Seven
Group of Ten
Group of Twenty
Group of Twenty Two
Generally Accepted Accounting Principles
General Agreement on Tariffs and Trade
General Data Dissemination Standard
Government-Linked Company
Government of Indonesia
International Association of Insurance Supervisors
International Accounting Standards
International Accounting Standards Board
Indonesian Bank Restructuring Agency
International Corporate Governance Association
International Federation of Accountants
International Financial Institutions
International Financial Reporting Standards
International Monetary Fund
International Monetary and Financial Committee (IMF)
Institute of Directors
International Organization of Securities Commissions
Korea Accounting Standards Board
Korean Committee on Corporate Governance
Korea Development Bank
Korea Deposit Insurance Corporation
Abbreviations
KFAS
KITC
KLSE
KSE
LLL
LOI
MAS
MASB
MEFP
MICG
MITI
MSE
MOF
MOFE
NBFI
NEAC
NEP
NGO
NOP
NPL
NTA
NYSE
OBS
OECD
OFC
PCA
PCG
PPP
PSPD
ROA
ROCA
ROSC
ROE
SC
SODS
SEC
SET
SFC
SME
SOE
TRIS
UMNO
'WT O
Korea Financial Accounting Standards
Korea Fair Trade Commission
Kuala Lumpur Stock Exchange
Korean Stock Exchange
Legal Lending Limit
Letter of Intent
Monetary Authority of Singapore
Malaysian Accounting Standards Board
Memorandum of Economic and Financial Policies
Malaysian Institute of Corporate Governance
Ministry of International Trade and Industry (Japan)
Ministry of State-Owned Enterprises (Indonesia)
Ministry of Finance
Ministry of Finance and the Economy (Korea)
Non-Bank Financial Institution
National Economic Action Council (Malaysia)
New Economic Policy (Malaysia)
Non-Governmental Organization
Net Open Position
Non-Performing Loan
Net Tangible Assets
New York Stock Exchange
Office of Banking Supervision (Korea)
Organization for Economic Cooperation and Development
Offshore Financial Center
Prompt Corrective Action
Principles of Corporate Governance (OEeD)
Purchasing Power Parity
People's Solidarity for Participatory Democracy (Korea)
Return on Assets
Risk management, Operational control, Compliance,
and Asset quality
Report on the Observance of Standards and Codes
Return on Equity
Securities Commission (Malaysia)
Special Data Dissemination Standard
Securities and Exchange Commission
Stock Exchange of T hailand
Securities and Futures Commission (Korea)
Small or Medium Enterprise
State-Owned Enterprise
Thai Rating and Information Services Co.
United Malays National Organisation
World Trade Organization
xv
Introduction
International Standards and
Financial Governance
The financial contagion that spread from Thailand in mid-1997 to the
rest of Asia and then on to Brazil, Russia, and finally to the developed world's
financial centers was a m;:yor shock to the global economy. It was also a
shock to global political elites and a watershed in the long-running debate
about the need for reform of the global financial architecture. Faced with a
crisis that destabilized some of the world's most rapidly growing countries,
governments in the major developed countries responded by launching one
of the most ambitious governance reform projects in living memory. Its main
objective was to transform domestic financial governance in emerging mar
ket countries and, in particular, to eradicate the "cronyism, corruption, and
nepotism" assumed to lie at the heart of Asia's (and by extension most of
the developing world's) financial vulnerability.
The envisaged transformation was consistent with a new consensus in
Western policymaking and academic circles. In promoting the adoption of
"international best practice" standards of regulation, the reform project ad
vocated a transition from a relational, discretionary approach to regulation
to a more arm's-length, nondiscretionary approach. Others have summa
rized this as a transition from a "developmental" state toward a neoliberal
"regulatory" state (e.g.,Jayasuriya 2005) .1 A key characteristic of "regulatory
neoliberalism," best seen as an ideal type, is the delegation of regulation
and enforcement to strong "independent" agencies. The act of delegation
itself has become associated with international best practice as the preferred
solution to time inconsistency and policy capture problems.2 The model of
regulatory neoliberalism suggests that the agencies that apply and enforce
regulation should be technocratic, apolitical, and insulated from predatory
2
G<;verning Finance
vested interests. Once achieved for financial regulation, developing coun
tries might more fully-and hopefully much more safely-participate in
the global financial system.
How was such a convergence upon regulatory neoliberalism to be
achieved? The governments of major countries saw the solution in the
elaboration of best practice international standards of financial regula
tion and the promotion of developing country compliance with these stan
dards. Compliance with international standards is different from the ideal
type of regulatory neoliberalism, but it has been seen a,s the main means
of bringing about convergence upon the latter. I argue that this approach
has serious flaws. First, the international standard-setting process is inevita
bly politicized and often produces standards that are sometimes vague and
at other times inappropriate to the circumstances of particular countries.
Second,even when international standards do approach current "best prac
tice," country compliance is often poor and the international mechanisms
for promoting compliance are weak.
The focus of this book is primarily upon the latter problem.In particular,
what determines the quality of compliance with international standards?
And, related to this, why is poor quality compliance sustainable over time
despite the apparently considerable pressure from multilateral institutions
and capital markets to adopt international standards? At various points
I discuss why some international standards are of poor quality or inappro
priate for many developing countries, but my main focus is upon the com
pliance problem and the obstacle this places in the path of convergence
upon regulatory neoliberalism.
The problem is not simply that regulatory neoliberalism is an ideal type
that can never be fully realized in practice. Rather, I argue that the depth
of the compliance problem reveals that the main sponsors of the interna
tional standards project misconstrued the politics of state transformation
and so underestimated the possibility of reform failure. Behind the vision of
encouraging a transition toward regulatory and institutional best practice
is a strong presumption that Western rules and practices could be patched
relatively easily onto developing political economies thereby de-politicizing
financial regulation. In practice,however,we see a highly politicized reform
process in which domestic groups that stand to lose from these reforms
mobilize to block or to modify it. In some countries, and in some areas of
regulation, these groups have successfully penetrated the new regulatory
frameworks, with the result that the quality of compliance with interna
tional standards varies widely.
Low compliance with international standards does not always mean poor
quality regulation (though it often does). In the more successful coun
tries, political and economic elites have adapted international standards
to suit local conditions. Notably, contrary to the prescriptions of regulatory
International Standards and Financial G
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