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EXPLOSIVE GROWTH IN CHINESE AND INDIAN BANKING MARKETS – DRIVEN BY BANKING REFORM AND DEREGULATION

London, May 04, 2006 – In 1995, the five largest banks in the world by tier 1 capital were Japanese. Since the recession in Japan in the late 1990s and the Asian financial crisis of 1997, the largest banks in the world have all been European and American. New research from TowerGroup finds this scenario will change with the rise of the new “Asian tigers,” China and India, and the wealth that these countries are generating for Asia as a whole.

Highlights of the research include:

• CHINA: With a population of 1.3 billion, more than US$1 trillion in personal savings, over US$60 billion in foreign direct investment as of 2004, and a rapidly growing middle class, China will drive the biggest change in financial market dynamics across the Asia-Pacific region when it deregulates its banking marketing in 2007

• For domestic banks across Asia, increased openness and participation in the global financial services infrastructure will mean having to differentiate themselves through specialized market focus and being “best in class” at something. They will need to learn from today’s leading banks about ways to incorporate professional management disciplines as well as the customer-focused cultures typically lacking in Asian banks today

• Many overseas banks are now looking toward Asia, and particularly China, as their next area of focus and investment. Many foreign banks are likely to begin with commercial banking operations, as Asian corporations increasingly try to access the bond markets for their capital and trade finance requirements. Another reason foreign institutions will start with commercial banking is that retail banking remains difficult, given that many of these countries have historically offered government-supported free banking

“Within the next 10 years, at least four of the largest banks in the world will be Asian in origin,” says Theodore Iacobuzio, managing director of the TowerGroup European Banking & Payments practice and co-author of the research. “Key changes in policy to open up Asia’s banking markets, including the sweeping banking deregulation planned in China for 2007, are fuelling the rise of China and India as financial powers and inspiring a new way of thinking among Asian bankers.”

Iacobuzio noted that this new way of thinking encourages enterprise; introduces the discipline of market, credit and operational risk management; reduces government support and control of individual banking institutions; and allows for greater foreign investment and ownership in domestic banking operations.

Chris Skinner, associate director at TowerGroup and co-author of the research adds, “Deregulation will create a massive swell of new services, capabilities, revenues and opportunities for further foreign stake in the domestic Asian banking markets.

“However these rewards will not come without risks, particularly given that some issues at the heart of the 1997 Asian financial crisis still linger. For example, some Asian banks and certain countries still lack the rigid procedures to manage credit risk you see in North America and Europe, and tend not to have the same professional financial management skills and automation typical of financial markets in other regions. Until the implementation and proven success of Basel II Capital Adequacy and its professional risk management framework, foreign banks investing in Asia will still find the going tough – though nowhere near as tough as it was 10 years ago.”

The new TowerGroup report co-authored by Iacobuzio and Skinner and titled, “Deregulation of Banking in China, 2007: Fueling the Rise of the New Asian Tigers,” is available to qualified members of the press for review.