Asia to `Monitor' U.S. Banking Crisis; Assess Impact

By Shamim Adam

Sept. 15 (Bloomberg) -- Asian policy makers, whose banking industries have largely averted the crises in U.S. and Europe, said they are assessing developments in the world's biggest economy to ensure minimal impact on their financial systems.

``We are closely monitoring the moves of Asian markets and trying to figure out how these developments will affect the Japanese market,'' Bank of Japan's chief press officer Yoshihiro Sugimoto said as Lehman Brothers Holdings Inc. announced plans to file for bankruptcy and Bank of America Corp. agreed to buy Merrill Lynch & Co. for about $50 billion.

Asian stocks, U.S. futures and the dollar tumbled as Lehman prepares for liquidation, deepening a crisis that threatens to tip the global economy into a recession. Financial institutions worldwide have reported more than $500 billion in losses and writedowns and the credit-market collapse has erased $11 trillion from global stocks in the past year.

``Some people say Lehman may not be the last case, there may be more to come,'' Thailand's Finance Minister Surapong Suebwonglee said today in an interview in Bangkok. ``We will monitor the situation closely.''

Markets in Japan, South Korea, China and Hong Kong are closed for holidays today. Stock indexes declined by more than 1.5 percent in Australia, Singapore and Taiwan. The MSCI Asia Pacific excluding Japan Index lost 1.7 percent.

The Federal Reserve widened the collateral it accepts for emergency loans to securities firms, and a group of 10 banks that includes JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. separately formed a $70 billion fund to ensure market liquidity.

Market Jitters

The Reserve Bank of Australia said it injected additional cash into the financial system amid concern credit market jitters may deter banks from lending to each other. The central bank added A$2.1 billion ($1.7 billion) through so-called repurchase agreements today, according to its Web site. Last week, the bank provided a daily average of A$982 million.

``Asia still faces a potential drag from the credit turmoil and banking crisis,'' said David Cohen, director of Asian forecasting at Action Economics in Singapore. ``The impact on Asia depends on how the current developments will translate into a deepening financial crisis.''

Japan's financial regulator is gathering data to examine the impact on Japanese financial firms of a Lehman bankruptcy, a spokesman for the watchdog said.

Sovereign Wealth Funds

``We are in contact and cooperation with overseas regulators including those in the U.S.,'' Toshiyuki Miyoshi, a spokesman for the Financial Services Agency, said today in Tokyo. ``We are currently gathering information and working to understand the situation.''

Asian sovereign wealth funds and other financial institutions in the region have been increasing their investments in U.S. and European banks that were forced to restore depleted capital after they wrote down investments tied to the U.S. subprime-mortgage meltdown.

Government of Singapore Investment Corp. has injected funds into Citigroup Inc. and UBS AG, while China Investment Corp. invested in Morgan Stanley. Merrill Lynch raised capital from Korea Investment Corp. and Singapore's Temasek Holdings among others.

The world may face ``Japan-like'' economic stagnation as turmoil in financial markets weighs on growth and challenges the ability of policy makers to manage the crisis, Tony Tan, deputy chairman of Government of Singapore Investment Corp., said in Geneva yesterday.

U.S. Slump

``If house-price declines are significantly greater than expected, larger financial institutions could become insolvent, the credit crunch would be more severe and economic growth could weaken considerably,'' Tan said. ``A vicious deflationary cycle with falling house prices, failing financial institutions and weaker growth could then ensue.''

The worst U.S. housing slump since the 1930s is showing little sign of abating and more than 10 lenders in the world's No. 1 economy have collapsed this year.

The U.S. Treasury Department and the Federal Housing Finance Agency this month seized control of Fannie Mae and Freddie Mac after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies.

``It's a critical situation in those countries and one can't say with certainty whether the financial crisis is deepening or not,'' said Chakravarthy Rangarajan, a former top economic adviser to India's Prime Minister Manmohan Singh and an ex-governor of the nation's central bank.

Sri Lanka's central bank said it changed its ``investment patterns'' as the subprime crisis unfolded and cut its exposure to Lehman during that time.

``Lehman acted as primary dealers for very few government securities investments,'' said Priyanthi Liyanage, director of international operations at the Central Bank of Sri Lanka. ``We used to invest in capital markets through these banks. We have no exposure to Lehman now.''

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net