(Bloomberg) -- Singapore’s financial regulator has warned of risks to banks’ profits and foreign-currency funding stemming from a slowing global economy and increasingly uncertain outlook.
While the nation’s banking system remains healthy and lenders continue to have “ample capital and liquidity buffers,” low interest rates and slowing credit growth could squeeze profit margins, the Monetary Authority of Singapore said Thursday in its annual Financial Stability Review. Banks must “be vigilant” to pressures on their foreign-currency liquidity positions, it added.
Banks in Singapore have been expanding loans in foreign currencies due to the country’s status as an international financial hub and as local lenders diversify abroad. That underscores their reliance on stable dollar funding, making them vulnerable to possible market swings.
Citing liquidity stress tests conducted with the International Monetary Fund, the MAS said that banks could struggle to convert their excess Singapore dollars into foreign currencies in the event of “severe dislocations” in the swap market.
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The ratio of foreign-currency loans to deposits remains “at an elevated level” of 125.7% as of October, the authority said. Local banks’ U.S. dollar ratios have consistently remained well below 100%, and foreign lenders in the country can rely on “relatively stable” funding from their headquarters, it said.
“U.S. dollar funding risks bear continued close monitoring,” the MAS said. It urged banks to continue to strengthen their management of foreign-currency liquidity risk and develop contingency plans.
The regulator also said that bad-loan ratios have remained “broadly stable,” despite an uptick in trade-related industries in the recent quarter.
“While the projected improvement in the manufacturing sector in 2020 should cap a further deterioration in non-performing loans, the trade-related sectors as a whole still bears closer monitoring,” it said.
