US bank failure losses downplayed

Contagion losses from the failure of US banks are likely to be small for the Association of Southeast Asian Nations Plus 3 (ASEAN+3), but policymakers in the region are advised to adopt measures to mitigate risks in the short and medium term, the ASEAN+3 Macroeconomic Research Office (AMRO) said.

In its analytical note, the regional think tank said “expected losses from any contagion to the Asian financial system from the SVB (Silicon Valley Bank) and SB (Signature Bank) events would be small.”

It said outputs generated from its systemic network of worldwide expected-losses of institutions model suggest that any interconnection to the financial institutions in the ASEAN+3 region appears to be more peripheral.

AMRO also said the hardest hit economies in the ASEAN+3 would be those where technology sectors play important roles in trade and services.

In the Philippines, Bangko Sentral ng Pilipinas Governor Felipe Medalla said earlier the country’s banking system is ready to withstand possible shocks from the collapse of some banks in the US.

While the estimated losses are expected to be small, AMRO said the full impact on the US economy and spillover effects to the rest of the world are still uncertain.

To mitigate potential spillovers and prevent similar events domestically, the AMRO recommends measures for policymakers in the region.

“For now, authorities should take steps to deal with the manifestation of any immediate risks, and in the medium-term, put in place strategies to protect the domestic financial system against potential shocks from the interlinkages between conventional and digital finance,” the AMRO said.

With ASEAN+3 central banks able to deploy policy tools during the COVID-19 pandemic to ensure adequate liquidity and smooth credit access, including through the reduction of reserve requirements and purchase of government bonds, the AMRO said they should be prepared to innovate and/or redeploy their toolkits again should the need arise.

As the vulnerabilities of banks with different business models may vary, the AMRO also said stress scenarios and shock parameters should be designed to be forward-looking and adequately capture the risk profiles of balance sheets.

In addition, it said ASEAN+3 regulators should identify systemically important financial institutions as the macro-financial environment evolves.

“In this regard, it would be useful to require banks to disclose the extent of their financial linkages with other institutions and firms. Such institution-level data could help regulators track the possible reverberation of any credit event or liquidity squeeze throughout a network of linkages, and identify potential systemic risks and take appropriate measures before a crisis occurs,” the AMRO said.

For banks found to be highly interconnected, the AMRO said regulators may put in place stricter capital and liquidity requirements.

As technology startups typically face challenges in tapping conventional banks and diversifying banking partners, AMRO said ASEAN+3 policymakers should provide incentives for developing diversified and robust financial ecosystems for startup firms, as well as targeted financial education.

AMRO said this would not just reduce the startups’ reliance on one institution and enhance their financial resilience, but also impact the financial system as a whole.

With the ASEAN+3 region vulnerable to volatile capital flows during global stress events and given increased risks to the region from the rapid adoption of financial technology and financial digitalization, AMRO also said there is a need to strengthen the regional financial safety net to meet new challenges and safeguard financial stability.