S’pore central bank warns of overborrowing risks


Singapore banks are well capitalised and household debt is low relative to assets but the current low interest rate environment could lead to excessive borrowing by individuals and firms, the city-state’s central bank warned on Thursday.

The Monetary Authority of Singapore in its annual Financial Stability Review also said Singapore banks are well capitalised and should have little difficulty meeting the new Basel III requirements.

“Local banks’ balance sheets and capital positions remain strong. Their combined Tier 1 Capital Adequacy Ratio , which has been steadily rising over the past 11 quarters, averaged 14.2 percent in Q3, 2010,” MAS said in its report.

“Owing to their high starting capital base and healthy loan-to-deposit ratios, the higher capital requirements that will be required are not likely to have a significant impact on local banks’ supply of credit to the economy,” the central bank said.

Singapore’s three local banks DBS Group, Oversea-Chinese Banking Corp and United Overseas Bank are the dominant players in the local mortgage and SME markets but compete with global players such as Citigroup and HSBC in financing the needs of bigger companies.

Under the new Basel III rules, banks around the world will have to raise their Tier 1 capital to 6 percent from 4 percent between Jan 1, 2013 and Jan 1, 2015.

The new rules also demand a higher minimum common equity ratio along with a buffer requirement which means banks must meet a 7 percent core Tier 1 capital requirement by Jan 1, 2019.

Low interest rates

MAS, however, warned of the risks posed by low interest rates that could prompt banks to lend more aggressively.

“Financial institutions may be tempted to loosen lending standards in a bid to extend more loans in the face of thinning margins,” the MAS said in the 91-page report.

Singapore’s household net wealth, defined as household assets less household debt, stood at an estimated S$1.16 trillion in the third quarter of 2010 — a 29 percent improvement from the trough in the first quarter 2009.

But the central bank noted household debt has increased in recent quarters due to the quick economic turnaround and prevailing low interest rates.

Singapore interest rates are near record lows, with the overnight rate hovering around 0.05 percent and the three-month interbank rate at 0.44 percent.

“When interest rates eventually rise, overextended households and corporates could be affected, thus impairing repayment ability and eventually impacting banks’ asset quality,” the central bank said.

The MAS voiced concerns about European banks and the risk to the global economy although it said the outlook for non-Japan Asian economies is positive and supportive for Singapore.

Singapore’s government said last week it expects the economy to grow by 4-6 percent next year after a projected 15 percent expansion in 2010.