Wed, Sep 15, 2010 - Page 12 News List

FSC cautiously optimistic about banking stress test

By Crystal Hsu  /  STAFF REPORTER

The Financial Supervisory Commission (FSC) said yesterday it was cautiously optimistic that all domestic lenders would emerge unscathed from the ongoing stress test given their strong capitalization and low non-performing loan positions.

The commission has asked 35 banks to conduct a stress test before the end of today to ensure they can withstand unexpected credit losses in case of an economic downturn, rising unemployment and falling real estate prices.

“I’m confident all banks can pass the test,” Financial Supervisory Commission Secretary-General Lin Tung-liang (林棟樑) told a media briefing. “The hypothetical external pressures are unlikely to materialize given a strong economy.”

The commission asked lenders to assess their capital adequacy under two scenarios — assuming an economic contraction of 1.4 percent and 2.73, an unemployment rate of 6.08 percent and 7.39 percent, and real estate prices falling by 10 percent and 20 percent.

All the banks should be able to bear the losses, Lin said, noting that their average capital adequacy ratio stood at 11.61 percent as of June 30, while their bad loan ratio dropped to a record low 0.87 percent and their coverage ratio reached 118.98 percent in late July.

The lenders will likely remain unaffected even if the commission stiffens capital requirements as required by the Basel Committee on Banking Supervision, whose mandate is to define the reform agenda for the global banking community.

The Basel committee on Sunday reached a decision requiring financial institutions to raise their ratio of core capital (equity plus retained earnings) against risk-bearing assets to 3.5 percent in 2013, from the current 2 percent, and to 4.5 percent in 2015.

The average ratio for domestic lenders exceeds 7 percent, Lin said, adding that the commission would adjust capital requirements later to keep them in line with international norms.

In related news, the commission yesterday revised regulations on foreign mutual funds, capping the amount held by domestic investors at 70 percent, from the current 90 percent, of their net worth.

The commission said the change was aimed at protecting domestic investors as foreign funds should not derive too much of their assets from the nation.

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