Australia's financial integration in Asia lagging

Australia's financial integration in the Asia-Pacific is lagging the rapid growth of the financial services sector in the region, according to a new study.

The Australian Centre for Financial Studies has looked at the extent to which Australia's deepening economic and political relationship with the Asia-Pacific region is reflected in the financial services industry.

"While Asia represents two-thirds of Australia's global trading relationships, it still accounts for less than one third of Australia's cross-border financial relationships," the report said.

The ACFS study found that Australia's investment relationships remain oriented towards the traditional trading partners of the United States, United Kingdom and New Zealand, which together account for 50 per cent or more of cross-border investment into and out of Australia.

More than 70 per cent of Australian financial services exports (including sales by Australian-owned affiliates or subsidiaries overseas) are oriented towards the US, the UK and New Zealand.

Australia's financial services exports in 2013/14 were 5.7 per cent of total service exports, which is low in comparison to the size of the industry in Australia.

The proportion of funds sourced from offshore represents only 5.4 per cent of funds under management with Australian resident investment managers. In Singapore 80 per cent of funds are sourced from offshore, in Hong Kong the proportion is 65 per cent and in the United Kingdom 40 per cent.

Part of the reason for the lag is that there are high barriers to entry, with restrictive regulatory and legal regimes in the major Asian economies.

ACFS said Asia had some of the most restrictive practices in both commercial banking and insurance, with China, Indonesia and India the most restrictive.

Barriers to entry include the fractured nature of the banking sector in the region, with a variety of regulatory and licensing regimes. Many jurisdictions in Asia require a degree of "on-shoring", which imposes additional costs.

ACFS said there was a lack of good data on all of this. The benefits and costs of financial integration receive only limited attention in academic literature and there is not much standardised data.

Baseline data on trade in financial services is poor and data on inbound and outbound investment flows can be patchy. There are definitional problems and also problems capturing the activities of parts of the business, such as affiliates.

The report acknowledges that financial integration comes with risks. These include greater exposure to external shocks and contagion, more volatile capital flows and challenges in relation to cross-border supervision.

Speaking at the release of the report yesterday, Reserve Bank assistant governor Guy Debelle said: "One question that is worth contemplating is whether there is such a thing as an optimal degree of financial integration. Can there be too much of it?

"The experience of the financial crisis shows that at least some forms of financial integration didn't go too well."