Opportunities for Asia in Europe bank crisis Fears of a credit crisis in Asia are abating as funding pressures on European banks ease. That in turn eases the pressure on those banks to shrink their balance sheets by selling assets far from their home markets on the continent. That is good news for Asia as a whole given its dependence on credit to fuel economic growth, especially since debt capital markets remain under-developed throughout the region. Still, even a less dramatic pullback from Asia by European banks will create opportunities especially for local players and lead to a transformation of the Asian credit landscape. The improved liquidity of the European banks largely reflects the willingness of the European Central Bank to extend three-year funding to its charges at attractive prices, a programme JPMorgan economists refer to as quantitative easing for the banks. In addition, though, European banks have discovered that aggressive asset sales can be counterproductive. The rules specify that if the loans are good, the banks need take only 3 per cent of capital as backing for them. So when assets are marked at par, sales below 97 cents on the euro force the banks to deduct capital at a time when they are desperate to augment their capital. "European banks will only sell if it isn't capital negative," says one French banker. Of course, if the assets are already marked down, then there is more incentive to sell. Instead of big asset sales at fire sale prices, the European banks are creating vehicles against which they can borrow cheaply from their peers at rates that are attractive. By putting their highest quality loans in these vehicles as collateral, they can borrow from Asian banks - especially the Japanese banks - at lower rates than they would otherwise pay. But while the short-term funding situation of the banks is no longer quite as dire, long-term capital challenges remain. The essential choice of raising capital or shrinking their balance sheets remains for many continental European banks. There are sectors that will feel the pullback especially harshly, including cash-strapped airlines, shipping businesses and very long-term infrastructure projects. Thus, this week in Hong Kong, a $1.2bn portfolio of loans from Crédit Agricole was being dissected by potential buyers including Japanese and Chinese banks, Singaporean insurers and local hedge funds, among others. About a quarter of the portfolio consists of loans to troubled companies which require labour-intensive financial restructurings in which the debt may well turn into equity. Such loans have attracted attention from credit and distressed hedge funds, who say the assets are attractive in a low-yield world. They could be so lucrative in fact that they don't need to use borrowed money, or the kind of vendor financing provided by the selling banks a few years ago. Meanwhile, the Japanese banks are at the opposite end of the spectrum, looking mostly at the highest-quality stuff. It is easy to see why. They have plenty of liquidity - and the net interest margin for Mitsubishi UFJ on its loan portfolio in Japan is a mere 0.09 per cent, according to its financial statements. By contrast, it can make at least a full percentage point more on lending in Asia outside Japan. The still risk-averse Japanese banks generally prefer to buy assets from or lend to the more cash-strapped European banks rather than making new loans in the region. For example, Sumitomo Mitsui Financial, possibly the smartest buyer, has looked at $80bn worth of loans from European banks, and bought judiciously everything from an $800m portfolio from Bank of Ireland at 85 cents on the dollar to the aviation leasing business of Royal Bank of Scotland for $7.3bn. Indeed, all three of the big Japanese banks profess to have big ambitions for the region. Local banks, including Maybank in Malaysia and DBS in Singapore are also on the prowl while the Australian banks are sometimes buyers and sometimes sellers. HSBC and Standard Chartered are likely to pick up the slack, especially in areas like trade finance. The Chinese remain the biggest unknown, in part because they don't report to the Bank of International Settlements, which tracks cross-border lending. The Chinese banks have been largely discouraged from ambitious acquisitions in the US, though ICBC did buy Bank of East Asia's American branches last year. Whether the Chinese ultimately take advantage of the troubles of the European banks or not, they are doubtless pondering the opportunity. Asia is, after all, a more welcoming terrain and still the fastest-growing region in the world. It is far more attractive to Asian banks than either the US or Europe. Henny Sender is the FT's Chief International Finance Correspondent