RETAIL BANKING | Staff Reporter, Singapore

Which APAC banks stand the most vulnerable to US tightening?

The impact spares no market in either developed and emerging Asia.

APAC banks with higher dependence on foreign funding and inflated external debt levels stand the most vulnerable to US tightening monetary policy as they face steeper market, credit and liquidity risks, according to a report from credit rating agency Fitch.

Banks in Hong Kong and Singapore, which have high foreign-currency exposure due to their status as regional financial hubs, may be susceptible to abrupt shifts in market sentiment that can cause market volatility.

For emerging-market financial systems, thin capital buffers in the banks of Vietnam and China may not be enough to defend them against higher local rates brought about by steeper US rates.

Indian banks could also be negatively impacted by higher local rates amidst issues hounding the banking system including ballooning bad debt and market risk impact on security holdings.

Also read: Can Indian banks weather the last wave of bad loan resolution? 

Mongolia and Sri Lanka are similarly vulnerable, with higher levels of foreign-currency liabilities and potential spillover from macroeconomic weakness.

“Severe market stresses, including large capital outflows and difficulty in accessing offshore funding markets, is a tail risk that could affect Asia-Pacific banking sectors more harshly than we currently envisage,” Fitch noted.

However, APAC banking sectors have demonstrated litle vulnerability to the last Fed rate hike cycling from 2004 to 2006 when the target rate rose from 1% to 5.25%, suggesting that the Fed tightening will be mostly manageable for the region’s financial services sector.  

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