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.
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