In two of the most prominent regional groupings in the world today, the age of heavy dependency on bank financing is now on the decline. Prompted by two different financial crises, namely the 1997 Asian Financial Crisis and the 2008 Global Financial Crisis, the European Union (EU) and the Association of Southeast Nations (ASEAN) are now embarking on ambitious projects to develop their regional capital markets as alternative means of financial intermediation and sources of financing. The EU calls theirs the Capital Market Union (CMU) whilst ASEAN has dubbed theirs the Capital Market Integration (CMI). These similarities are not purely coincidental but show the future trajectory of financial markets around the world. From an academic’s point of view, one asks: do these then justify a comparative study of the two regions and their proposed initiatives to develop and integrate their respective capital markets? As I explain in more detail in my paper, the answer is both yes and no.
The two regions and their initiatives are comparable because they share some notably important similarities. Firstly, the member countries in both regions are at different stages of development. Thus, it has to be first ensured that every member is at relatively the same level of development before the region can embark on integration. There is no uniform blueprint for this which can be applied to all; each member would require a different method and sequence for capital market development. Secondly, membership in the two regions is non-homogenous. Both have to contend with different languages, cultures, and institutions, as well as varying legal traditions and laws applicable to capital market transactions. Thirdly, both regions are faced with the problem of how to mobilize savings (lodged in bank deposits) into productive investments. To do this, aside from introducing regulatory reforms, they also have to figure out how to modify investor behavior, remove the bias against investing, and minimize aversion to risk. Lastly, both initiatives lack any provision that ensures financial stability despite having their roots in banking crises. Whilst this is arguably covered by EU’s Banking Union (Green Paper: Building a Capital Markets Union), ASEAN does not cover this at all.
Despite these similarities, it cannot be denied that fundamental differences between the institutions as well as the varying levels of capital market development of the two regions have an effect on the sequencing of the measures adopted and on the way integration is pursued.
The EU’s integrative process can be described as ‘inward-looking’, whilst ASEAN’s is ‘outward-looking’ (see Monetary and Financial Integration in East Asia). An inward-looking process means that the EU is prioritizing reforms which would apply across the twenty-eight Member States. An outward-looking process is the complete opposite; ASEAN member states tend to first adopt market practices in line with the global standards whilst closely guarding their domestic markets from each other. In terms of the sequencing of the measures, the EU is focusing first on the ‘low hanging fruit’ to gain momentum for the more complex and deeper reforms. On the other hand, ASEAN does not seem to have a sequential plan. Instead, they have adopted the ‘ASEAN minus X’ formula, where members that are ready to implement the measures agreed upon are allowed to do so ahead of the others. This was viewed as the only way to move forward owing to the huge inequality in terms of capacity and levels of development between the member states.
The two regions’ diversity with respect to their institutional development, regulatory maturity, and general attitude towards regional integration also imply that interregional coordination of market practices and regulations between the two regions will not take place in the near future. For starters, ASEAN needs to have a harmonized capital market regulatory system first. Moreover, even if ASEAN’s foray into capital market development commenced earlier than the EU, the latter is still ahead in terms of overall level of market maturity. Thus, ASEAN needs to prioritize programs specifically geared towards the development of the capital markets of individual ASEAN members if it ever hopes to catch-up. It should also balance its outward-looking tendency with an inward-looking one to avoid further delays and prevent the fragmentation of the regional capital market.
Michelle Dy is a Research Associate at the Centre for Banking & Finance Law of the National University of Singapore.