Asia-Pacific Banks Brace for a New Era of Macroeconomic Volatility
The Asia-Pacific (APAC) region is navigating a period of heightened macroeconomic uncertainty, driven by geopolitical tensions, climate change, global inflation, and supply chain disruptions. Financial institutions are responding by re-evaluating risk management frameworks, moving beyond traditional models to embrace more dynamic and resilient strategies.
The Wake-Up Call: US Tariffs and Market Miscalculations
The imposition of sweeping US tariffs in April 2025 served as a stark reminder of the potential for unforeseen market impacts. Many financial institutions underestimated the extent of the disruption, particularly the unexpected pressure on bond markets alongside equities. Sam Ahmed, managing director of Deriv Asia X, noted that existing linear modelling proved inadequate for this “black swan” event.
Ahmed highlighted a critical miscalculation: the assumption that tariffs would trigger a flight to US Treasuries, when instead, five- and 10-year Treasuries sold off as yields rose, with selective flows into emerging market assets. This underscored the need to consider multiple layers of risk, including the potential for unexpected market reactions.
Beyond Historical Data: The Rise of Stochastic Modelling
A reliance on historical data in stress tests left many banks unprepared for the tariff shock. Traditional value-at-risk and correlation models are proving insufficient in a world characterized by “black swans” and “fat tails.” Banks are increasingly turning to Monte Carlo stochastic modelling to introduce randomness and multiple scenarios into their risk assessments.
However, stress-testing has limitations. As one head of liquidity management at an APAC bank pointed out, “You can perform lots of stress-testing…But you don’t know exactly what the next event is going to glance like.” This has spurred interest in reverse stress-testing and macroprudential analysis to identify vulnerabilities and potential systemic risks.
Intraday Liquidity: Lessons from SVB and Credit Suisse
The failures of Silicon Valley Bank (SVB) and Credit Suisse highlighted the critical importance of intraday liquidity – the ability to convert assets into cash quickly during a crisis. Banks are now scrutinizing their high-quality liquid assets (HQLA) to ensure they can meet obligations even in speedy-moving situations.
The Monetary Authority of Singapore recently published new liquidity risk management guidelines, emphasizing more granular details of regulatory expectations. Bloomberg’s David Allright stresses the need for dynamic, real-time risk reporting and data-driven stress tests to model changing conditions.
OCBC has proactively addressed this challenge by using blockchain technology to establish a short-term US dollar funding mechanism with JP Morgan, providing access to dollar funding even before US markets open.
Interest Rate Shocks and Asset Duration
Sudden swings in interest rates are prompting banks to reassess asset exposure and shorten the duration of their holdings. Roland Ho, global head of asset-liability management at OCBC, explained that calibrating interest rate risk and managing notional amounts are crucial to mitigating potential valuation hits from rising rates.
Banks are also exploring hold-to-collect accounting for fixed income assets to reduce volatility in capital ratios, but this approach is only suitable for assets intended to be held long-term for regular cash flows.
Regional banks in Japan are facing deposit outflows as customers seek higher returns elsewhere, potentially leading to funding squeezes and the need for riskier investment opportunities.
A Structural Shift in the Global Financial Landscape
Beyond short-term shocks, there’s a growing recognition of a potential structural shift in the global financial system. A fragmented geopolitical landscape is contributing to a gradual decline in the use of the US dollar, both as a reserve asset and a payment currency.
While some countries are promoting their domestic currencies, the dollar’s deep liquidity and widespread use outside the US remain significant advantages. Ashok Das, Deutsche Bank’s head of global emerging markets, noted that despite geopolitical risks, there isn’t a viable alternative to the dollar currently.
However, a trend towards market fragmentation is emerging, with corporates increasingly seeking to invoice in their local currencies. This requires risk managers to diversify or hedge US dollar exposure.
FAQ
Q: What is ‘black swan’ event in finance?
A: A ‘black swan’ event is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.
Q: What is Monte Carlo simulation?
A: Monte Carlo simulation is a computerized mathematical technique that uses random numbers to model the probability of different outcomes in a process that cannot easily be predicted.
Q: What are HQLA?
A: HQLA stands for High Quality Liquid Assets. These are assets that can be easily and immediately converted into cash with little or no loss of value.
Q: What is reverse stress testing?
A: Reverse stress testing identifies scenarios that would cause a bank to fail, rather than assessing the impact of predefined scenarios.
Pro Tip: Regularly review and update your risk models to incorporate new data and evolving market conditions. Don’t rely solely on historical data.
Did you know? The US tariffs imposed in April 2025 caught many financial institutions off guard, highlighting the need for more robust risk management frameworks.
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