Local 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 assess the resilience of their balance sheet and capital positions under two macroeconomic scenarios over a three-year horizon.
The Central scenario 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.
The Adverse scenario features an intensification of geopolitical conflicts and trade tensions that exacerbates supply chain and trade disruptions. The quick succession of supply shocks reignites inflationary pressures, forcing major central banks to respond with tighter monetary policies. The global economy slips into a deep and protracted recession as higher borrowing costs and volatile financial conditions result in weaker corporate profitability, pullback in investment and depressed consumer sentiments.
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Rising rates further dampen demand for commercial properties, leading to a deterioration in outlook for the highly-leveraged commercial real estate (CRE) sector in major economies and significant declines in CRE prices.
At the same time, the Chinese economy faces headwinds from a deepening residential property market downturn that weighs on domestic demand as consumer confidence and household wealth are adversely impacted. Regional economies are impacted extensively due to their close trade ties with China, in addition to the softening global demand conditions.
MAS paints a dire picture under the Adverse scenario. The Singapore economy enters a recession amid weak external demand, rising commodity prices and elevated interest rates. The global recession leads to a sharp downturn in the external-facing sectors such as manufacturing, transportation and finance & insurance.
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Elevated interest rates and rising unemployment put pressure on corporate and household debt servicing abilities, causing banks to incur increased credit losses as defaults rise. Singapore banks also face elevated market and funding liquidity risks via their extensive cross-border interlinkages.
The decline in the aggregate 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.
Ratcheting up the adverse scenario, cross-border interbank contagion was simulated by assuming a tail-risk scenario of the default of a single country’s banking system as the trigger event. The analysis then simulated the interactions among three risk transmission channels — counterparty country banking system defaults, funding liquidity stresses and fire sales of assets.
Contagion cascades through the global interbank network when counterparty country banking systems deplete their capital buffers and default, triggering further rounds of second-order shocks within the network. The simulation terminates when no new defaults materialise.
The stress simulations adopted conservative assumptions, where country banking systems were only able to recover 50% (i.e. loss-given default or LGD of 50%) of loans extended to any defaulted country; they (banks) face a 50% pullback of funding that had previously been obtained from any defaulted country’s banking system; and incur significant liquidation and replacement costs in the form of a 50% haircut on their assets under a fire sale.
In a tail-risk scenario with the maximum capital loss, the overall CET1 ratio would decline by an additional 220 bps under the Adverse scenario and remain above MAS’ minimum regulatory requirements. At the same time, the overall LCR would also stay above regulatory thresholds, as the combined liquidity impact from the funding pullback and fire sale of assets would not exceed 5% of the banking system’s total stock of high-quality liquid assets (HQLA).
In other words, the D-SIBs would be able to withstand multiple shocks.
MAS says it will continue to refine its stress testing capabilities to ensure that stress tests remain relevant as a tool for risk assessment and management.
