Out-Law / Your Daily Need-To-Know

MAS flags emerging long-term risks to global financial system

10 Dec 2021, 12:28 am

The transition to a low carbon economy due to climate change and the emergence of crypto assets are two potential sources of long-term global financial risks, the Monetary Authority of Singapore (MAS) has said.

Bank loans to businesses in certain sectors may experience transition risks as the result of the worldwide transition to a low carbon economy, while the future stability of crypto assets and their markets is becoming more significant given their continued growth, according to the regulator’s financial stability special report.

Medium-term vulnerabilities are building up especially with interest rates expected to gradually rise, the shift towards a low-emissions economy and crypto-assets gaining prominence in financial activity.

In the report (126-page, 2.04MB PDF), MAS said “while these risks may be less pronounced at this juncture, they warrant close monitoring and an active assessment of options due to their potential to rapidly develop and materialise into significant financial stability risks”.

Lisa Hui of Pinsent Masons MPillay, the Singapore joint law venture between MPillay and Pinsent Masons, said: “Despite the Covid-19 pandemic, the global financial system has remained resilient this year and we have seen unprecedented levels of deal making activity. However, medium-term vulnerabilities are building up especially with interest rates expected to gradually rise, the shift towards a low-emissions economy and crypto-assets gaining prominence in financial activity. We expect the central banks and regulators to continue to keep a close eye on the impact of climate risks on assets and the growing crypto-asset market.”

Other risks include increasing non-financial corporate debt, rising property prices, and increasing sovereign debt, which resulted from governments’ economic stimulus packages during Covid-19.

MAS points out the transition to a low-carbon economy comes with both physical risks and transition risks. The former refers to the economic costs and financial losses from the exposure of human and natural systems to climate-related events; while transition risks are the economic and financial costs of the adjustment to a low-emissions economy, including those associated with policy changes, technological breakthroughs, and shifts in investor preferences and social norms.

In the report, MAS also listed sectors which would be potentially affected in a disorderly transition to a low carbon economy. These ‘climate policy relevant sectors’ are fossil fuels, utilities, energy-intensive manufacturing, housing, transport and agriculture.

MAS suggested financial institutions and authorities should build up their capability to assess the risks of various economic activities and support the transition to a low carbon economy. It said it would further refine its analytical approaches to quantify banks’ and insurers’ exposures to risk across time, and monitor institutions’ measures in managing their transition risk exposure.