Moody's Investors Service on Monday highlighted five low-probability but high-impact risks that Asia Pacific banks could face this year, despite a benign credit environment.
The five downside risk scenarios that the Moody's analysis views as increasingly disturbing are contagion risk from Europe's sovereign crisis; the possibility of a hard landing for the Chinese economy; the bursting of real estate bubbles in Asia; a downturn in commodity prices; and a downturn in the Australian property market.
These are all potential hazards that could develop into material adverse shocks for particular systems, Moody’s said.
"These are not our central scenario, but what we consider as "tail risks", or low-probability, but potentially high-impact events that warrant close monitoring over the coming 12 months," said Stephen Long, a Moody's Managing Director for the Financial Institutions Group in Asia Pacific.
Regarding contagion risk, Moody's said that banking systems in Australia, New Zealand, Korea and Vietnam are the most vulnerable to financial and economic shocks from a Euro area crisis.
While another downside scenario is the risk of a China hard-landing, a somewhat comforting conclusion from Moody's stress test is that the profitability, loss reserves, and capital positions of Chinese banks still provide a strong cushion.
The report also says that a substantial downturn in real estate prices in Asia would only have a limited impact on the region's banking systems in general.
In addition, Moody's expects the credit impact of a commodity price downturn to vary across the region, with potential distress concentrated in net commodity exporters, but also a risk among midstream processors.
The final single-economy tail risk identified in the analysis is a downturn in the Australian property market. However, Moody's noted that Australian banks are protected against the direct impact of falling house prices by their low loan-to-value ratios, and the use of mortgage insurance.
RECOMMENDED FOR YOU
POPULAR