9. Financial soundness indicators f

9. Financial soundness indicators for the big three domestic banks remained strong
during the global and European crises. Singapore banks are among the highest rated in the world,
with higher capital ratios and lower leverage than peer banks. Profitability is high and diversified.
Asset quality is good and NPLs are low and well provisioned (Table 5 and Figure 4).
10. Stress tests suggest that banks are resilient to adverse macroeconomic scenarios. Their
high capitalization could offset potential losses, including from large exposures to real estate. The
scenarios described in Box 1 and Table 6 entail large declines in domestic and regional economic
activity, falling asset prices, rising interest rates, and rapidly rising unemployment. Both the bottom
up (BU) and top down (TD) stress tests conducted by MAS suggest that capitalization ratios would
still remain above the domestic minimum regulatory capital ratio of 10 percent. Trading losses
would be limited owing to the absence of significant proprietary trading and the fact that trading
books mostly comprise domestic sovereign bonds.10 Credit losses, distributed between corporate
loans and residential mortgages, would erode the capital base, while increased probabilities of

10 Losses from sovereign exposures are less than 1 percent of RWA. Interest rate risks are negligible due to the
prevalence of floating rate loans (including mortgages).
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default (PDs) would be reflected in an increase of risk-weighted assets, magnified by the initial low
PD levels. All these factors would drive capitalization ratios down by almost one third. IMF TD
solvency stress tests broadly confirm the results obtained by MAS, with balance sheet stress tests
highlighting the resilience of domestic banks even if residential loan defaults were to reach the
levels observed in the United States in the aftermath of the 2007-09 subprime crisis.
11. Despite banks’ overall resilience to credit risk, country concentrations require close
monitoring. From a systemic perspective, exposures outside Singapore are heavily concentrated in
the region. MAS is fully cognizant of the growing regional linkages, follows these exposures closely,
and considers that they are within safe limits. Even so, regional exposures need to be monitored
closely in view of the possibility of a sharp or prolonged regional slowdown. Furthermore, given the
low level of NPLs, small increases in NPLs could quickly erode provision coverage.
12. More generally, MAS should give more attention to onsite inspections of banks’ credit
risks. The philosophy of MAS is to place significant emphasis on holding bank management
accountable for the quality of underwriting and credit quality. While bank management, bank risk
management systems, and prudent internal risk cultures are the first line of defense against weak
loan and asset portfolios, strong onsite inspections are a necessary complement.
13. Liquidity shortages in foreign currency could affect some banks. When consolidated
across all currencies, the LCRs of most banks and foreign branches, calculated using the parameters
recommended in Basel III, exceed 100 percent, but the coverage for U.S. dollar exposures is lower.
Stress tests suggest that if banks’ ratings were downgraded by several notches, some banks would
find it difficult to continue to close their U.S. dollar funding gaps using the FX swap market. Over a
one-year horizon, banks could require as much as U.S. $50 billion (about one fifth of foreign
reserves). Given the possibility that liquidity conditions could tighten globally once U.S. dollar
interest rates begin to increase, this illustrates the potential for pressure on Singapore’s foreign
exchange position.
B. Banks—Interconnectedness
14. Foreign banks in Singapore mainly operate as branches, which by definition are closely
interconnected with their much larger parent institutions. While branching facilitates an efficient
allocation of capital and liquidity within the overall bank, and may contribute to stability when the
parent is sound, instability in the parent may give rise to risks for the country hosting the branch.
Branches pose special challenges for supervision and resolution. MAS is aware of these risks and has
taken measures to mitigate them (Box 2). MAS has also advocated in international groupings for
greater sharing of supervisory information, including on the G-SIFIs active in Singapore.
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15. The FSAP examined whether branches pose material threats to financial stability.11 It
assessed the ability of branches to maintain sufficient assets vis-à-vis local liabilities through the
Asset Maintenance Ratios (AMRs) imposed by MAS. It also assessed potential spillovers from direct
and indirect exposures in the domestic and cross-border interbank markets.