Asia’s local financial institutions can no longer afford merely to tinker at the edges; more open markets, more demanding customers and foreign institutional investors, and more intense competition from abroad are all putting extraordinary pressure on private and state-owned banks to raise their game to unprecedented levels. To survive, such banks will have to improve their performance hugely over the next few years. In fact, they will have to remake themselves from the ground up.

The transformation of Asian financial institutions will unfold in three stages. In the first, they will have to secure their lifelines by recapitalizing and restoring public confidence in their basic solvency. In 1998, foreign banks like Citibank, HSBC, and Standard Chartered were flooded with deposits from Hong Kong, Malaysia, and Singapore as frightened depositors moved money from local institutions to these seemingly more secure multinational ones. To win back such deposits and reassure long-term corporate borrowers, local banks will certainly have to show that they are financially sound by writing off bad loans, receiving new capital, and implementing more transparent policies.

Local financial institutions will have to change their strategies and their management cultures

Refocusing, stage two, will have to proceed nearly in parallel...