SINGAPORE: Singapore is well positioned to weather the impact of rising interest rates, when loose monetary conditions globally come to an end.
This is according to the Monetary Authority of Singapore (MAS), which released its financial stability review on Tuesday.
The central bank gave a generally positive assessment of the country's financial stability.
The findings support an earlier study by the International Monetary Fund under the Financial Sector Assessment Programme, which subjected banks in Singapore to stress tests simulating adverse macroeconomic conditions.
Singapore's banking sector is likely to remain resilient even under extreme conditions.
This is based on stress tests conducted by the MAS, which included scenarios such as a fall in Singapore's GDP for three consecutive years, rising unemployment, and property prices falling by more than what was experienced during the Asian financial crisis.
Still, the MAS report flagged risks such as rising borrowing among households and corporates, the local banking system's growing exposure to cross-border loans, particularly to China and India, and financing strains for bonds and REITs that could emerge due to an interest rate spike.
After the Lehman crisis in 2008, the gross flows of funds -- both loans and deposits -- between Singapore and China, and between Singapore and India have grown by 85 per cent and 129 per cent respectively, compared to pre-2008.
According to the report, loans to China and India now represent 9.2 per cent and 4.2 per cent respectively, of total loans made by local and foreign banks located in Singapore.
Analysts said most of these risks have been well-highlighted for some time now. But the central bank seems to have taken a more cautionary tone in this year's review.
Irvin Seah, senior economist at DBS Bank, said: "The authority sounds more cautious this time round, essentially because of an impending risk of higher interest rates going forward. And higher interest rates would essentially increase the financing cost for corporates and households, especially those who are exposed to the property market. It will have a negative impact on asset prices, asset markets, (and) it will also slow overall growth momentum."
Ivan Tan, Director of Financial Institutions Ratings at Standard & Poor’s, said: "Property-related loans are the largest single loan (item) on the banks' books -- it accounts for around 30 per cent of total banking system exposure. So whatever happens to the fundamentals of the household will have a very real and direct implication on the credit quality of the banks."
And analysts said it is this rising interconnectedness -- be it between households and banks, or between a Singapore lender and its overseas client -- that will pose the biggest challenge to financial stability.
Under the financial stability review, the MAS also disclosed for the first time an estimate of the size of the potential shadow banking system in Singapore.
Shadow banks are non-bank financial institutions involved in lending activity but are not subjected to the same regulatory controls as traditional lenders.
The MAS said that potential shadow banking in Singapore is "small relative to the regular banking system".
Using the assets of non-bank financial intermediaries as a proxy, the MAS puts the size of the shadow banking system at S$923.7 billion.
That is about a quarter of the S$3.5-trillion-dollar Singapore financial system.
According to the MAS, the shadow banking system in Singapore includes exchange traded funds, hedge funds, private equity funds, broker-dealers and other investment funds.
Still, the central bank said these players do not pose significant shadow banking risks, and "they have limited linkages with the banking system and financial markets".