ANCHOR OF ECONOMIC

AND FINANCIAL STABILITY

THE ECONOMY
FINANCIAL VULNERABILITIES AND RISKS

Global financial markets performed strongly in FY2013, underpinned by improved economic prospects in advanced economies and still- accommodative global monetary conditions. From April 2013 to March 2014, the S&P 500 rose by 19.9%, the DJ Eurostoxx rose by 21.5%, and the Nikkei 225 rose by 22.2%. Meanwhile, the MSCI Asia ex-Japan Index rose by a more moderate 0.6% as emerging markets experienced some market volatility triggered by uncertainty over QE tapering.

In the advanced economies, financial conditions have improved significantly alongside continued progress in financial system reforms and the repairing of bank balance sheets. In Europe, investor confidence was buoyed by the successful bailout exits by a number of crisis-hit Euro zone economies. While immediate risks to the Euro zone have been contained, structural reforms to ensure fiscal sustainability and the clean-up of bank and corporate balance sheets are needed to avoid further flare-ups.

In China, there are concerns over shadow banking and rising local government debt. Policymakers are taking active measures to contain growth in shadow banking and reform China’s banking system.

Despite market volatility in emerging markets, Asian banks have remained resilient, supported by healthy capital buffers and sound funding profiles. Looking ahead, Asian banks face headwinds from QE tapering, slower economic growth and declining asset quality - risks that may be amplified by the continued build-up of leverage in emerging Asia.