Staff Papers
Published Date: 01 December 2004

Macroeconomic Determinants of Banking Financial Performance and Resilience in Singapore.

MAS Staff Paper No. 38, December 2004 - By Robert St. Clair


Using data available since 1990, this study explores possible macroeconomic determinants of changes in Singapore's local banks' financial performance and resilience.  Econometric estimation focuses on changes in core banking indicators, such as income, expenditure, profitability, labour demand, capital holdings, and liquidity.  The research aids banking sector surveillance, by highlighting a core set of macro indicators, which may, in turn, forewarn of periods of financial stress.  The most important macroeconomic indicators are changes in interest rates, exchange rates, unemployment, and aggregate demand.  On average, roughly two-thirds of the changes in the local banks' aggregate financial performance can be explained by changes in the macro environment. The results provide a couple of insights for risk-focused banking supervisors.  Firstly, it is important to monitor lending behaviour, credit quality, and expense controls, when the business cycle and loan growth strengthens.  This is because there is the potential risk that growth in profits, and financial resilience more generally, will be eventually eroded by extra provisioning for NPLs.  Secondly, supervisors need to be aware that sharp rises in interest rates may place significant downward pressures on capital and liquidity.