This week was my first visit to Bangkok since the floods in December. The city seems to have recovered and the economy is on the mend. After an estimated 0.1 percent growth in real GDP in 2011, the International Institute of Finance (IIF) is forecasting a robust 7 percent growth recovery in 2012, helped by a multi-year fiscal stimulus that would bring the fiscal deficit to an estimated 5.5 percent of GDP for the fiscal year 2011-2012.

The package of fiscal stimulus included a 40 percent hike in minimum wages from April and an aggressive cut in corporate income tax rate from current 30 percent to 23 percent and a further cut to 20 percent for 2013. This would put Thai corporate tax rate closer to those of its neighbours.

The combination of increase in minimum wage rates and generous price support programme for rice mean that the government is serious about tackling income gaps and pushing consumption.

The purpose of the Bangkok trip was to debate the future of Asian banking business models. The central question is how to recycle Asian savings within Asia. Because of its demographics and prudence in consumption, East Asia has always run a net current account surplus, with its accumulation in savings placed largely in the advanced markets. Why can't some of these savings be used to fund much needed infrastructure within the region?

In 2003, Dooley, Folkerts-Landau and Garber named the current cross-Pacific arrangement Bretton Woods II, where Asia funded the US current account deficit by reinvesting its savings back in the advanced markets. This arrangement can also be called the Grand Bargain.

Basically Asia swapped dollars for jobs for the youth entering the labour force and the exploitation of its natural resources. The Grand Bargain is ending as Asians realise that their holdings of dollars may be exposed to future depreciation and that Asian labour force and natural resources should not be cheap forever.

The Grand Bargain had implications for the advanced country banking business models. A deficit country will very soon find that its banking system must have loans/deposit ratios running higher than 100 percent, because the excess consumption has to be funded by credit.

In Asia, the average loans/deposit ratio is lower than 100 percent, because savings are larger than debt. The American banking system had to shift from retail banking into a wholesale banking system, relying on securitisation of its assets (mortgages and loans) and selling them into the global market to fund its loan book.

Quite a lot of AAA-rated securities ended up in European portfolios, because the prudent Asians stuck mostly to Treasuries. Thus, when the subprime crisis erupted in 2007, the European banks were one of the bigger victims.

There are good reasons why US and European banks evolved into leveraged wholesale banks turbocharged by derivative markets. Ninety percent of OTC derivative trading in the US are dominated by five large banks. Europe as a region accounts for 70 percent of total global interest rate derivative trading.

The Atlantic banks went into proprietary trading and financing engineering because by the 1980s, under competition from the Japanese banks, net interest margin business (basically the margin between lending rate and deposit rates) became less and less profitable.

This shift out of traditional retail banking business was also due to the free market ideology to reduce market friction to zero by lowering transaction costs (such as transaction taxes and commissions). In the old days when brokers made money from fat commissions, they were willing to provide research for their customers.

When margins became near zero with computerised trading, securities firms engaged more and more into proprietary trading and leveraged trading in order to make money. Good quality research became scarce. Banks made more money from “pushing” derivative products to their retail investors, because they could earn more fees up-front and from granting credit to their customer from leveraged trading.

The combination of proprietary trading and leveraged derivative financial engineering morphed banking business away from being a trusted agent of the real sector into a competitor or principal that may trade sometimes in conflict against the interest of its customers. The financial sector became a principal in its own right, with total assets larger than the real sector and therefore Too Big to Fail.

This change in culture was exemplified by the remarkable Op-Ed by Greg Smith, a former executive director in Goldman Sachs, published in the International Herald Tribune on March15, 2012, which I read on the plane back to Hong Kong. He basically highlighted the debate whether one should be making money for the bank or making money for the client.

Because Asia as a whole did not run into deficit, the banking system has not strayed from its retail banking roots. After the painful lessons of the 1997-98 Asian financial crisis, Asian regulators have been much more cautious in allowing Asian banks to go the derivative route.

The game is changing dramatically because Asian interest margins are also beginning to be squeezed as competition intensifies. Some Asian banks are already being rapped on the knuckles for not paying enough attention to client suitability in selling inappropriate wealth management products to customers. So the debate on whether Asian banks should make more money from capital market business is very much on the table.

This raises a fundamental question which the current global regulatory reforms have not addressed. I have gone on record to say that if green engineers are paid less than financial engineers, will we expect a green economy to emerge before asset bubbles? Similarly, if banks are to serve their real sector customers better, what policies are required to induce them to make more money from real customer service than leveraged proprietary trading?

This means that regulators need to pursue less what banks should not do, but what business models are appropriate for the banks to serve the real sector better? This obviously requires the regulators and the industry to have a better conversation than the current lines of engagement.

The Daily Star/Bangladesh/ 18th March 2012

The shareholders of Southeast Bank Ltd by their unanimous votes approved 15 per cent cash dividend and 5 per cent stock dividend to the shareholders and the financial statements of the Bank for 2011. They also re-elected directors and approved appointment of external auditors for the year 2012, says a press release.

The approval came at the 17th annual general meeting (AGM) of the Bank that was held on Thursday at Officers’ Club, Dhaka. Bank’s directors, sponsors and large number of shareholders attended the meeting. Alamgir Kabir, chairman of the Bank, presided over the meeting.

Mahbubul Alam, managing director of the Bank, highlighted the Bank’s operational performance in 2011 and outlined the future plans and programmes to be undertaken by the Bank to boost up operational efficiency and profitability of the Bank.

The AGM witnessed a lively discussion on the Bank’s operational performance. The Southeast Bank earned an operating profit of Tk 6,085.66 million in 2011. As on December 31, 2011 Bank’s total deposits amounted to Tk 127,178.22 million, its total assets reached Tk 158,078.59 million, Earning Per Share was Tk 2.33, Net Asset Value per share was Tk 23.30 and Net Operating Cash Flow per share was Tk 14.40.The Price Earning Ratio of the Bank was 12.88.

The capital and reserves of the Bank soared to a record high of Tk 19,000.06 million as on December 31, 2011. The Bank maintained a capital adequacy ratio at 11.46 per cent as on 31st December, 2011 against requirement of 10 per cent set by Bangladesh Bank.

Credit Rating Information and Services Limited rated the Bank AA- (Double A Minus) for the long term and ST-2 for the short term based on the financial statements of the Bank for 2010.

The Daily Independent/Bangladesh/ 16th March 2012

Razib Zaman interviews Mostaq Ahmed Sadek (Right)

Merchant banks borrow from their parent organisations but they have to waive interests. They thanked the scheme committee for recommending waiver of interests. They will be able to waive interests if their parent organisations do so.

Parent organisations are controlled by the Bangladesh Bank. So, the recommendations cannot be implemented unless BB issues any circular. There is nothing to worry about. It will be implemented.

The authority concerned should take the initiate to execute the recommendations hurriedly to bring back confidence over the market, Mostaq Ahmed Sadek, Managing Director of Investment Promotion Services said at an interview with Razib Zaman of ETV.

The following is the details of the interview.

* DSE Chairman to be elected today (Thursday).

# Directors elected by the members of the brokerage houses will choose the chairman. The elected chairman will gain popularity, we expect. A competent leadership is required for overall improvement of the stock market. We hope, voters will not make any mistake in electing a new leader of the country's prime bourse.

* Investors several times in the past became frustrated as the decisions taken by the authority were not implemented. For example, we can talk about arrival of new funds. How do you evaluate this issue?

# We heard about arrival of funds but no fund entered into the market yet. It was reported in Today's (Thursday) newspapers that financial institutions earned crores of taka, and their lions part came from the share market. But institutional investors do not provide any support to the market. Several quarters blame that government's bank borrowing is responsible for such a crisis, but so far I know the government made some repayments.

* (Ratan from Bhairab through telephone): I purchased shares seeing PE-ratio, but now suffered 20 percent loss. What should I do?

# The ups and downs of share prices has to be considered as normal phenomena. If you look at different stock exchanges around the globe, you will observe that investors even suffer up to 70 percent losses. It will not take much time to recover your 20 percent loss. Please have patience.

* You said online trading will start from 25 March though there are no complexities regarding omnibus account. What would you say about this?

# We are going for online trading on 25 March. Notice has been served in this regard. We have to purchase new server for starting online trading. Every house has to spend Tk 1.5 to 2.0 million. And we are ready. The advantage of online trading you will be able to operate share transactions from your home with a broker ID number. Earlier you had to come to the brokerage houses for trading. Investors in remote areas or abroad will also be able to trade. So the sphere of share trading will be expanded.

* (Monir through telephone): I have seen in newspapers that transactions of MH Securities have been suspended. I have many IPOs there. Can those be sold? What am I to do?

# DSE has given notice that those who used to trade with MH Securities can go to other brokerage houses through link accounts or can withdraw funds. If you face problems you can contact DSE directly.

* Entrepreneur directors do not have much time on their hands to buy shares. Would you say something about it?

# They have 10 to 12 days to purchase shares. They will have to purchase about 80 percent shares. To my knowledge, the banks earned good profits but declared dividend according to their own will. I can't understand why they are doing so miserly. Every brokerage house and merchant bank can introduce advisory service after taking licence from DSE. They can take advisory fee and charge. If you are capable of providing service, and have adequate technical knowledge then you can apply for licence. If this service starts then rumours will end.

* You have visited many stock exchanges of the world. You might have notices that the number of institutional investors is higher than personal investors in those countries. Would you kindly make the matter clear?

# Retail traders like our country is not seen in anywhere in the world. Fund managers conduct business in every country. Institutional investors do not play any role of fund managers here. Merchant banks could and should have played the role of fund managers. Everyone is playing the role of retailer. Nobody is going into long-term investment. Had they done so then 50 percent shares would have been blocked - then the market would have stabilised. Everyone has the tendency to be rich over the night.

* Merchant banks are saying that they are suffering for sanctioning excess loans or from notices served by SEC. What is your opinion regarding this?

# Who encouraged them to give excess loans. Merchant banks have done business two folds - on one hand they did interest business. They encouraged investors in taking loans. They offered Tk 1 crore loan against deposit of Tk 1 crore. Merchant banks lobbied and took permission from SEC to give loans. When the market became overheated they stopped giving loans. They used this process as a key. It is they who damaged the market, so they cannot avoid their responsibilities. Investors didn't force them to provide loans. They cannot say they are not responsible.

* If I buy shares through advisory service of a company, can I claim compensation?

Another question: What will happen if anyone buys shares through advisory service?

# When you open BO accounts with a brokerage house you will have to decide what type of account it will be, and whether you need advisory service. If yours is a discretionary account then all the responsibility will go with brokerage houses. It will ask for a fee or you can share a certain percentage of profit with them. If you want to open an account or know in details, you can talk to a brokerage house.

Whatever entrepreneur directors may have done, if they want to stay as directors they will have to buy certain percentage of shares set by the government within 15 days.

The Daily Sun/Bangladesh/ 16th March 2012

The loan agreement for specialised Rapid bus service project for smooth movement of the commuters from northern city outskirts would be inked in May.

The Detail Project Proposal (DPP) of BRT is likely to get approval of the Executive Committee of National Economic Council (ECNEC) by April, a communications ministry official told newsmen after a meeting with ADB delegates at the ministry yesterday.

A seven member high powered delegation of Asian Development Bank (ADB) led by its vice president Xiaoyu Zhao along with the country director M. Teresa Kho met Communications Minister Obaidul Quader and talked about the progress of the BRT (Bus Rapid Transit) project.

The cost of Airport-Gazipur section of the project has been estimated at $ 255 million in which ADB will contribute $ 160 million, Agency France for Development (AFD) $ 45 million and Global Environment Facility (GEF) $ 4.6 million. The rest $ 45.4 million will be arranged by Bangladesh. The project is expected to be complete by March 2016.

The Daily Sun/Bangladesh/ 16th March 2012

Finance Minister Abul Maal Abdul Muhith said the government will issue licenses for new private commercial banks by April.

“The new banks would have to start their operations within six months after getting licenses,” he told reporters after a meeting with the visiting Asian Development Bank Vice-President Xiaoyu Zhao at his secretariat office yesterday.

Muhith said the number of licenses to be issued would be finalized by the board of Bangladesh Bank.

Asked whether there was any pressure to issue licenses in favour of three expatriate (NRB) welfare banks, he said, “There might be some pressure.”

The central bank received 37 applications on the circular it issued in September last year asking for proposal to set up new banks.

The Daily Sun/Bangladesh/ 16th March 2012