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Treasury & Capital Markets
Singapore financial sector resilient but risks remain
New Covid-19 variants, inflation and rising interest rates could impact stability, MAS warns
Tom King 7 Dec 2021

Banks, corporates and households in Singapore have stayed resilient during the pandemic, the Monetary Authority of Singapore (MAS) reports in its annual financial stability review. The financial regulator, however, warns that outbreaks of new Covid-19 variants, inflation and rising interest rates could present medium-term risks to the city-state’s financial strength and stability.

Overall, the MAS notes that indicators of vulnerability for the financial, corporate and household sectors have generally improved.

The Financial Vulnerability Indices (FVI) for the corporate and banking sectors have declined from last year, while that for households has remained steady.

The review affirms that Singapore’s banking sector has maintained healthy asset quality alongside strong capital and liquidity safeguards, while continuing to support the economy’s demand for credit.

While Singapore’s local banking groups’ net profits have been healthy, supported by non-interest income, their asset quality has been stable, with the non-performing loan ratio unchanged at 1.5% in the third quarter of 2021. They have also maintained robust capital and liquidity positions, with aggregate capital adequacy ratios and all-currency liquidity coverage ratios remaining well above regulatory requirements.

Similarly, the non-bank sector has weathered the stresses from Covid-19 with insurers well capitalized and investment funds able to meet redemptions.

Crypto and climate risks

The MAS’ stress tests have found that corporations, households, and financial institutions are well-placed and have adequate buffers to mitigate the impact of further adverse scenarios.

However, the report highlights medium-term vulnerabilities of the global financial system which the MAS says have grown, reflecting the build-up of non-financial corporate and sovereign debt, as well as higher property prices and elevated equity valuations.

These vulnerabilities could interact with potential shocks from the evolving macro-financial environment and pose a risk to financial stability, according to the report. The possibility of a sharper-than-expected tightening of monetary policy in response to persistent above-target inflation could also trigger a disorderly repricing of assets.

The MAS also sees the growing influence of crypto assets and climate change as “emerging vulnerabilities” for financial stability, with both warranting close monitoring due to their potential to rapidly develop and materialize into significant financial stability risks.   

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