Asian Alternatives to the G7 Bank Bailout

The trillion-dollar commitments made so far by governments, with the exception of Britain’s, have been biased toward restoring market confidence instead of healing the core of what ails banks. So it might be a good idea for them to look to Asia to help them get the job done, and to do it right, both in terms of strategy and funding.

Ending the crisis requires not only easing liquidity, but also repairing banks’ balance sheets and rebuilding their capital base. While the times call for a systematic approach, the solutions offered have been disjointed or inadequate. Guarantees on interbank lending won’t reduce bad loans; purchasing bad loans won’t improve banks’ ability to lend; and taking minority stakes in banks with marquee names ignores smaller ones that are just as likely to be badly exposed to sub-prime debt and thus unable to serve the local businesses and consumers that oil the economy.

One of the astounding things about the ongoing efforts to resolve the crisis has been the lack of a clear initiative to inspect banks’ balance sheets thoroughly. Regulators need to know just how many banks are in trouble and approximate how bad their situations are in order to design and implement targeted solutions. The measures that Asian governments took to repair their financial sectors during the Asian crisis ten years ago could provide a template for the US and European bailouts.

Asian governments borrowed heavily from the International Monetary Fund to bail out their crumbling financial systems. They assessed the health of major financial institutions, and then established asset management companies to acquire non-performing loans at a fraction of face value, as well as restructuring agencies to close insolvent banks, nationalize ailing ones, and recapitalize viable ones.