Singapore c.bank says banks need to monitor exposure to cross-border lending, US dollar funding
SINGAPORE Dec 3 (Reuters) - Singapore's banks need to carefully monitor their exposure to cross-border regional lending as they expand such activity, the city-state's central bank said on Tuesday, adding that banks also need to stay vigilant over their U.S. dollar funding.
"Reflecting confidence in Asia, the banking system's cross-border exposure to the region has increased. This confidence should be balanced with an appropriate dose of vigilance," the Monetary Authority of Singapore (MAS) said in its annual Financial Stability Review.
"Stresses arising from tightening financial conditions can manifest themselves quickly. Banks need to monitor and manage the risks from different types of exposures carefully," MAS said.
Loans to China and India now represent 9.2 percent and 4.2 percent, respectively, of total loans made by local and foreign banks.
The central bank added that while banks have been taking steps to improve their U.S. dollar funding profiles, continued vigilance was needed on this issue.
"Banks should also continue to manage their foreign-currency liquidity risks prudently, as an abrupt global financial tightening could result in U.S. dollar liquidity stresses," MAS said.
The banking system's Singapore dollar funding was adequate to support Singapore dollar loans, with a loan-to-deposit (LTD) ratio of 79.4 percent in the third quarter of 2013, it said.
The LTD ratio for non-Singapore dollar loans, however, stood at 128.2 percent in the third quarter, MAS said.
Both corporate and household balance sheets were healthy in aggregate and the banking system's asset quality also remains healthy, it said, adding that local banks remain well-capitalised and already meet Basel III capital requirements.
But rising indebtedness in the corporate and household sectors could exacerbate strains from any sharp increases in interest rates, MAS said.
"At this juncture, asset quality remains healthy, but this could deteriorate if an unexpectedly sharp rise in interest rates puts a strain on the debt-servicing ability of over-extended borrowers."
For the household sector, housing loans were a potential risk, the central bank said.
"Housing loans account for about three-quarters of total household liabilities, and could be a significant source of risk for households. The credit profile for certain housing loans was a source of concern," it said.
The household debt-to-income ratio has risen from a low of 1.9 times in 2008 during the Lehman crisis to 2.1 times in 2012, and household debt has grown more quickly than household assets since Q2 2011, MAS noted.
The central bank said close monitoring of Singapore's property market is needed, even after a series of policy steps led to a moderation in property market transactions and housing loan growth.
"However, developer bids for land parcels remain firm. The current uncertain environment warrants continued caution and vigilance."
MAS's Financial Stability Review, which is published once a year, is aimed at highlighting how developments in global financial markets and Singapore could have an impact on the soundness and stability of the city-state's financial system.
The central bank said economic growth in Asia has held up despite mixed conditions, partly because of the unconventional monetary policies adopted by major economies that has helped provide a near-term boost to global growth.
But one particular concern is the accumulation of private and public sector debt in recent years, MAS said.
"If G3 policy normalisation triggers an abrupt tightening of financial conditions, debt-servicing burdens in Asia can rise sharply," it said.
The U.S. Federal Reserve is widely expected to start scaling back its stimulus programme in coming months if data continue to point to a stronger economy. (Reporting by Masayuki Kitano and Rachel Armstrong; Editing by Kim Coghill)
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