The Financial Supervisory Commission (FSC) yesterday said that it is drafting a comprehensive stress test to gauge domestic banks’ ability to withstand wide swings in variables affecting risk exposure.
Unlike previous tests evaluating banks’ resilience against specific risk exposures, the latest test is to encompass macroeconomic factors such as the nation’s economic growth rate, jobless rate, the value of the New Taiwan dollar and interest rates.
Domestic banks have passed a number of stress tests simulating inclement conditions in specific segments, and have met the commission’s requirements for financial ratios.
In 2010, banks demonstrated that they were able to weather slowing GDP growth, rising unemployment and a cooling housing market and had managed to contain impacts to their financial conditions at the range required by the commission.
Stress tests on banks’ exposure to domestic home loans and loans by their China-based lending operations were carried out in 2014 and last year respectively.
The nation’s banks passed both tests, showing that they were able to contain impacts to their capital adequacy and tier 1 ratios at a level deemed manageable by the commission.
A Tier 1 capital ratio measures a bank’s financial strength based on the sum of its core equity capital and total risk-weighted assets, while capital adequacy determines the financial strength of a company.
The commission is reviewing the outcome of a stress test on banks’ exposure to yuan-linked target redemption forward (TRF) contracts that was conducted last month.
While analysts are in agreement that the worst of the concerns about TRF contracts have passed, as a majority of the contracts expired as of the end of last month, they said unexpected swings in the yuan’s strength could still cause significant losses for banks.
The FSC’s TRF stress test simulating a weakened yuan of 6.8 per US dollar was deemed inadequate, as the yuan is expected to fall to 7.5 against the greenback by the end of this year, Daiwa Capital Markets analyst Christie Chien (簡民惠) said in a client note last week.
Since the Chinese central bank devalued the yuan in August last year, TRFs have caused widespread losses for investors, while banks are facing rising exposure to the instrument’s refundable deposit against potential defaults by their clients.
Banks have also lost highly profitable items in their product mix as sentiments toward the troubled derivative soured.
PROBE
In related news, the commission said that it has asked its Financial Examination Bureau to probe allegations by New Power Party Legislator Huang Kuo-chang (黃國昌) that a number of banks assisted their clients to produce false financial statements and set up offshore accounts in a bid to promote TRF sales.
UNCERTAINTY: Investors remain worried that trade negotiations with Washington could go poorly, given Trump’s inconsistency on tariffs in his second term, experts said The consumer confidence index this month fell for a ninth consecutive month to its lowest level in 13 months, as global trade uncertainties and tariff risks cloud Taiwan’s economic outlook, a survey released yesterday by National Central University found. The biggest decline came from the timing for stock investments, which plunged 11.82 points to 26.82, underscoring bleak investor confidence, it said. “Although the TAIEX reclaimed the 21,000-point mark after the US and China agreed to bury the hatchet for 90 days, investors remain worried that the situation would turn sour later,” said Dachrahn Wu (吳大任), director of the university’s Research Center for
Alchip Technologies Ltd (世芯), an application-specific integrated circuit (ASIC) designer specializing in artificial-intelligence (AI) chips, yesterday said that small-volume production of 3-nanometer (nm) chips for a key customer is on track to start by the end of this year, dismissing speculation about delays in producing advanced chips. As Alchip is transitioning from 7-nanometer and 5-nanometer process technology to 3 nanometers, investors and shareholders have been closely monitoring whether the company is navigating through such transition smoothly. “We are proceeding well in [building] this generation [of chips]. It appears to me that no revision will be required. We have achieved success in designing
PROJECTION: KGI Financial said that based on its foreign exchange exposure, a NT$0.1 increase in the New Taiwan dollar would negatively impact it by about NT$1.7 billion KGI Financial Holding Co (凱基金控) yesterday said its life insurance arm has increased hedging and adopted other moves to curb the impact of the local currency’s appreciation on its profitability. “It is difficult to accurately depict the hedging costs, which might vary from 7 percent to 40 percent in a single day,” KGI Life Insurance Co (凱基人壽) told an investors’ conference in Taipei. KGI Life, which underpinned 66 percent of the group’s total net income last year, has elevated hedging to 55 to 60 percent, while using a basket of currencies to manage currency volatility, the insurer said. As different
Taiwanese insurers are facing difficult questions about the damage of recent swings in the New Taiwan dollar. Regulators might have a partial solution: letting firms change how they calculate the value of foreign currency assets. The Financial Supervisory Commission (FSC) is considering allowing insurers to use six-month average exchange rates when they calculate risk-based capital in their semiannual reports, a shift from the current system where insurers use exchange rates on the final day of reporting. The change could ease pressure on the US$1.2 trillion insurance sector, whose huge exposure to foreign assets came into the spotlight earlier this month after a