Living on cheap global funding

Last Wednesday, the MAS published its annual Financial Stability Review. The Review pointed out something that few people have noticed – that Singapore has become increasingly dependent on global cheap funding. It says our banks’ lending has outpaced deposits, particularly in non-SGD terms such that banks’ non-SGD loans have exceeded their non-SGD deposits by nearly 25%. In aggregate, banks’ total lending in both SGD and non-SGD to the non-bank sector have also exceeded the deposits from their non-bank customers. Our banks’ loan-deposit ratio is now at historical record highs. The MAS attributed the cause to the ready access to global cheap funding driven primarily by the Fed. Prior to the Fed’s serial QE, our banks’ loan-deposit ratio was mostly below 90%.

When banks cannot get enough deposits from the non-bank sector to fund their loans back to the non-bank sector, there are broadly two channels to obtain the extra funds – a. tap the capital market i.e. issue bonds or b. borrow from overseas (which can also be in the form of bond issuance or direct borrowing from banks overseas). More detailed statistics from the MAS’ monthly bulletin shows that the latter was the main source – our banks’ ACU (Asian currency unit or the portion of banks’ balance sheet for accounting their cross border activities) interbank deposits from overseas have shot up sharply. On the flip side, the banks’ ACU lending back into Singapore has also gone up sharply. That is, our banks are literally borrowing from other banks overseas to lend to each other. And as most interbank borrowing and lending go, the terms are usually short-term under 12 months rather than long-term.

The MAS’ Review points this out as a risk our banks face to a disruption of the cheap global funding. From my recollection, this is the first time that the MAS has issued a stern warning against this country’s high dependency on cheap global funding. However, it isn’t an unfamiliar refrain coming from other countries, notably from the Koreans and Thai authorites periodically, especially after the Lehman crisis. Across the region, these two countries’ banks run the highest loan-deposit ratios, well above 100% and have traditionally depended on foreign funding to plug their gaps. Now Singapore banks have joined their league. But not only that. Korean and Thai banks have worked hard at reducing their foreign funding dependency after the Lehman crisis while we have gone the opposite way.

It’s a phenomenon that has become quite universal. The Fed’s QE has been finding its way into “safe havens” across the world and Singapore is one such destination. However, at some point, the QE is finally working in defusing people’s fear to put money into riskier destinations. The MAS’ review is an annual one. By the time, this report is issued, our “problem” of banks’ loans going over their deposits is already over a year old. In fact, banks’ ACU activities with parties outside of Singapore have started to slow from October. Have you noticed that of late, our banks have started putting up their deposit rates?

In a way, the MAS could do something to slow down our banks’ borrowing from overseas without having to resort to the crude approach by other authorities. The Korean authorities last week cut the caps set on their banks’ foreign exchange derivative exposures. This is a crude approach which the MAS is unlikely to take as it could jeopardise Singapore’s status as an international financial centre. What the MAS could do instead is to keep sterilizing the liquidity of funds coming into Singapore through the FX forward swap market. By persistently buying USD forward against SGD, it would drive up the cost for banks to swap their foreign funds into SGD. This will in turn drive up the interbank cost in SGD. And indeed, we have been noticing that the SGD swap offer rate has been inching up.

So you’ve been forewarned – by none other than the MAS. And it does seem that our central bank has already started to clamp down on this by stepping up its FX forward intervention to hold up short-end rates. Of course, you may think this might not get very far if the Fed in the US keeps pursuing QE to hold down the USD Libor curve. This is true in the sense that under Ben Bernanke, it is very unlikely that the Fed shocks the world by ending QE abruptly. However, this is no guarantee that we are totally immune to another global credit event such as the US’ own fiscal cliff which is why the MAS is most likely going to step up its ante in the FX forward market.