Monetary Authority of Singapore Annual Report 2011/2012
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Financial Markets Experienced Higher Volatility

Financial markets experienced more volatility in FY 2011/12 as investor sentiment alternated between risk aversion and search for yield. In late 2011, euro area banking and fiscal stresses reached a peak over concerns about peripheral countries’ debt sustainability, financial stability and a potential Euro zone break-up. However, pressures on the government bond market and bank refinancing were alleviated in early 2012 through actions by policymakers, including a restructuring of Greek sovereign debt, and the provision of three-year liquidity to banks by the ECB.

Buoyed further by signs of a nascent economic recovery, markets in the US ended 2011 on a positive note. In contrast, emerging markets in Asia ended lower due to renewed uncertainty about the Euro zone crisis and the prospects of a slowdown in China. From March 2011 to March 2012, the S&P 500 rose by 6.2% while the MSCI Asia ex-Japan Index fell by 9.1%.

While the ECB’s policy actions have stemmed immediate bank liquidity concerns in the Euro zone, risks to stability persist in both advanced and emerging markets as European banking sector asset quality, capital adequacy and refinancing needs remain tail-risks and deleveraging pressures on European banks have increased. Asian banking systems have however remained resilient given banks’ generally strong capital and liquidity positions. As such, Asian banks have thus far been able to offset the decline in lending within the region caused by European banks deleveraging. Nevertheless, there may be limits to such substitution going forward due to counterparty limits, banks’ risk aversion and lack of expertise.