Local banks have adequate capital buffers to weather potential downside risks, says the Monetary Authority of Singapore (MAS) in its Financial Stability Report 2024, citing the results of the latest industry-wide stress test (IWST).
The liquidity buffers of the domestic systemically important banks (D-SIBs), including the three locally listed banks, are well above all-currency and SGD minimum regulatory liquidity coverage ratio (LCR) requirements and net stable funding ratios (NSFR), although NSFRs fell from their highs in 1Q2024 and 2Q2024. The other D-SIBs are Citibank, HSBC, Standard Chartered and Malayan Banking.
The nation’s banks continue to fund their assets with non-bank deposits, which make up more than 80% of their funding. In 3Q2024, the three local banks’ current account savings account (Casa) ratios to total deposits rose as customers moved to Casa when interest rates appeared to fall.
The IWST 2024 exercise required D-SIBs to evaluate the resilience of their balance sheets and capital positions under two macroeconomic scenarios over three years. Under the so-called “central” scenario, MAS assumes that the global economy continues to expand at a steady pace, with the last mile of disinflation supported by continued equilibrating supply-demand conditions. The Singapore economy expands around its potential rate and inflation eases amid moderating external cost conditions.
In contrast, the “adverse” scenario involves worsening geopolitical conflicts and trade tensions that disrupt supply chains and global trade. A series of rapid supply shocks reignite inflation, prompting central banks to tighten monetary policies — leading to a deep, prolonged recession, with higher borrowing costs and volatile financial conditions hurting corporate profits, slowing investment and dampening consumer sentiment.
Rising rates further dampen demand for commercial properties, leading to a deterioration in the outlook for the highly leveraged commercial real estate (CRE) sector in major economies and significant declines in CRE prices.
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At the same time, the Chinese economy grapples with a deepening downturn in the residential property market, which dampens domestic demand as consumer confidence and household wealth are hit. Regional economies, closely tied to China through trade, are also heavily impacted, further compounded by weakening global demand.
Under this “adverse” scenario, the heavily exposed Singapore economy enters a recession amid weak external demand, rising commodity prices and elevated interest rates. The global recession has led to a sharp downturn in the external-facing sectors such as manufacturing, transportation, finance and insurance.
The decline in the aggregate Common Equity Tier 1 (CET1) ratios under the “adverse” scenario is primarily driven by the rise in credit risk-weighted assets (RWA) of 3.9 percentage points and credit impairments of 1.8 percentage points, reflecting a significant deterioration in the asset quality of the D-SIBs.
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A tail-risk event was simulated to escalate the adverse scenario, assuming the default of a single country’s banking system as the trigger. The analysis then examined the interactions between three risk transmission channels: defaults in counterparty country banking systems, funding liquidity pressures and fire sales of assets.
Contagion spreads through the global interbank network as counterparty banking systems deplete their capital buffers and default, triggering successive second-order shocks. The simulation ends when no additional defaults occur.
The survey also shows that Singapore’s financial institutions are most worried about uncertainty in the macroeconomic environment, especially a slowdown in growth and a resurgence in inflation. Geopolitical risks, trade tensions and uncertain policies from newly elected governments were also highlighted as concerns. Among these, a slower-than-expected growth outlook for China was a key worry, as it could impact corporates, funds and loan portfolios with significant exposure to the country.
Geopolitical risk was also highlighted as a significant concern. The conflicts in the Middle East and Ukraine, coupled with rising protectionism, could disrupt global supply chains and trigger inflationary shocks in the commodities markets. These factors are likely to weigh on both growth and financing conditions.
Singapore banks and fund managers also floated their concerns over rising trade frictions, noting that the rivalry between the US and China has already led to changes in supply chains in the region. This friction could lead to credit and market losses through their exposure to externally oriented firms that are vulnerable to supply chain disruptions.
Currency and capital flow volatility were also key concerns. A resurgence in inflation stemming from the heightened tensions and uncertainties could prompt a “sharp pivot” away from monetary easing, leading to a broad-based strengthening of the US dollar (USD) and higher currency and capital flow volatility in the region.
