Will Singapore banks survive another global economic crisis?

Stress tests are increasingly important, regulators say.

Singapore's banking system will stay resilient even in light of escalating economic turbulence, Minister for Trade and Industry Lim Hng Kiang said in a speech to the Association of Banks in Singapore (ABS).

He noted that the central bank's annual industry-wide stress test showed that the banking systm will remain resilient even if major economies slip into recession, regional currencies depreciate sharply and commodity prices drop by half. Banks will also survive a severe and protracted recession in Singapore, even if it involves a record-high unemployment rate and a large correction in the property market.

"Non-performing loans would increase but still remain below the peaks seen during the Asian Financial Crisis. Under the prescribed stress scenario, the banks also continue to meet Basel regulatory requirements comfortably and would still have sufficient capital and liquidity to cover potential loan losses and cash outflows," he said.

While banks have strong capital buffers and robust liquidity coverage ratios, Lim highlighted that financial institutions cannot be complacent and must continue to improve risk management processes, particularly by rolling out consistent stress tests.

He noted that banks should compare the industry-wide stress test results against their own internal stress tests and sensitivity analyses and to assess whether the differences in scenarios and corresponding results reflect particular risk exposures faced by the bank.

“Banks should continue to improve risk management processes, and watch out for risks arising from new and emerging trends such as persistently low interest rates, increasing interconnectedness between financial institutions and markets, and the growing use of sophisticated technology,” he said.