MAS issues warning!

Dec 4, 2007

MAS WARNING: Credit squeeze, US slump could hit banks

A SHARP slowdown in the United States and an increased aversion to risk on the part of investors spooked by the sub-prime fallout could hurt the profitability of local banks, the Monetary Authority of Singapore (MAS) said yesterday.

Volatile financial markets may lead to trading losses, markdowns in collateralised debt obligation assets and lower fee income, said the central bank. Local banks have reported limited exposure to the US sub-prime problems, but their share prices have still been hit.

Despite the upheaval in global financial markets, Singapore's economy has remained sound. Full-year gross domestic product growth is expected to be closer to the upper end of a 7.5 per cent to 8 per cent range.

'The vulnerabilities in the international financial system exposed by the recent turbulence have heightened the risks to the region's growth outlook,' the MAS said in its Financial Stability Review.

The US economy could well experience a sharp slowdown due to the sub-prime crisis, in addition to the ongoing correction in the housing sector and soaring oil prices, it said.

'Slower US growth would affect Asia, given the region's high dependence on exports,' the MAS said.

A significant challenge for Asia remains the management of strong capital inflows, as these have posed risks like asset price inflation and volatile exchange rates, it said.