## 1. Gravity Model Results on Trade and Financial Interconnectedness

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### A. Introduction and scope
- Paper objective: take stock of financial interconnectedness in Asia and through Singapore, and explore the link between trade and financial flows.
- Key framing:
  - Asia-Pacific GDP per capita more than doubled between 1990 and 2023.
  - The region's contribution to global GDP growth rose from approximately a quarter to nearly two-thirds (text statement).
- Data and methods:
  - Uses international investment position (IIP), CDIS, CPIS, DOTS, network analysis (eigenvector centrality), and a modified gravity model.

### B. Asia’s financial integration with the rest of the world — main findings
- Aggregate shares and comparisons:
  - Asia and the Pacific make up over 30 percent of global trade and GDP, hold less than 30 percent of the total inward FDI stock, and make up less than 15 percent of global portfolio liabilities.
  - Asia’s share in global trade grew substantially in the late 2000s and early 2010s but has stabilized since then.
  - Asia’s share of global FDI has risen in recent years; share of global portfolio liabilities has been stable.
- Cross-border positions by country group:
  - Cross-border assets and liabilities in Asian advanced economies rose from around 100 percent of GDP in 1990 to over 500 percent in 2023.
  - Emerging market economies in the region: cross-border assets and liabilities as percent of GDP have remained relatively stable since the 1990s.
- Singapore’s role in bilateral FDI and portfolio claims:
  - About half of all FDI coming to Singapore is from either Europe or the United States.
  - The United States has become increasingly important as a source of FDI inflows to Singapore while the role of Europe has diminished.
  - Outbound FDI from Singapore is mostly destined to other parts of Asia.
  - On the portfolio side, about a quarter of portfolio investments is in U.S. assets, with China also playing an increasing role.
  - Portfolio liabilities for Singapore are small overall.

### C. Network analysis: trade, FDI, and portfolio investment networks
- Method: eigenvector centrality used to capture node influence across networks.
- Trade network (2023 snapshot and time evolution):
  - Chinese mainland rose since the 1980s; Japan declined in importance.
  - India, Hong Kong SAR, Singapore, and ASEAN included; Vietnam rose substantially.
  - Singapore’s centrality peaked in the late 1990s and has been on a slowly decreasing trend since.
- Direct investment (FDI) network:
  - Structure resembles the trade network closely.
  - Chinese mainland attracted substantial FDI; Japan’s relative decline visible.
  - Hong Kong SAR and Singapore have greater roles in the FDI network than in the trade network.
  - Singapore’s importance in the FDI network has grown steadily, having attracted significant FDI in recent years.
- Portfolio investment network:
  - Disconnected from trade and FDI networks.
  - Japan remains the biggest Asian holder of portfolio assets (slightly less dominant than in early 2000s), followed by Australia.
  - India and Chinese mainland increasing but remain small.
  - Singapore’s centrality broadly stable.
  - Overall, the portfolio assets network within Asia is dominated by advanced economies.

### D. Gravity model results — relationship between trade and financial exposures
- Model specification:
  - Modified gravity model with origin-time, destination-time, and origin-destination fixed effects (“fully saturated” specification).
  - Trade included on the right-hand side and lagged by one year to address endogeneity.
  - Dependent variables: stocks of inward FDI and portfolio investments (assets/liabilities; debt/equity).
  - Data sources: CDIS (FDI), CPIS (portfolio), DOTS (trade).
- Main empirical findings:
  - Trade is a key driver for FDI but not for portfolio investments.
  - Baseline regression result (Table 1): coefficient for lagged trade when dependent variable is inward FDI = 0.005*** (standard error 0.002).
    - Interpretation in text: a one percentage point increase in the bilateral trade relationship (as percent of average GDP) is associated with an increase in the FDI stock by approximately 0.5 percent.
  - Coefficient for lagged trade when using portfolio investment as dependent variable is insignificant for all types (assets/liabilities and debt/equity).
  - Findings robust to using shares rather than stocks and to including additional lags of the trade variable.
- Model fit metrics (reported in Table 1):
  - Observations by specification: 143,658; 156,872; 140,455; 119,888; 149,783; 135,842; 114,644.
  - Pseudo R2 by specification: 0.984; 0.993; 0.987; 0.994; 0.993; 0.987; 0.994.
  - Standard errors clustered by country-pair.

### E. Cross-border linkages of Singaporean banks — exposures and funding (December 2024 unless otherwise stated)
- System-wide scale and role:
  - Banking sector assets totaled 512 percent of GDP in December 2024.
  - Singaporean banks function as an intermediary channeling capital between advanced economies and emerging Asian markets.
- Cross-border assets:
  - Banks’ claims on non-residents: 116.6 percent of GDP, accounting for about 22 percent of total banking sector assets.
  - Composition of claims on non-residents:
    - Loans and advances including bills financing to non-residents: 67.4 percent of GDP or 12.8 percent of total banking system assets.
    - Securities and equities issued by private non-resident entities: 25.9 percent of GDP or 4.9 percent of total banking system assets.
    - Amounts due from non-resident banks: 23 percent of GDP or 4.4 percent of total banking system assets.
  - Time evolution:
    - Banks’ claims on non-residents declined from 141.3 percent of GDP in December 2021 to 116.6 percent of GDP in December 2024.
    - Loans to non-residents declined from 89.6 percent of GDP in December 2021 to 67.4 percent of GDP in December 2024.
- Cross-border liabilities and funding:
  - Liabilities of the Singaporean banking system to non-residents: 194.4 percent of GDP, accounting for 36.8 percent of total banking sector liabilities.
  - Composition of liabilities:
    - Non-bank deposits by non-residents: 86.7 percent of GDP.
    - Amounts payable to non-resident banks, including interbank loans: 107.7 percent of GDP.
- Local D-SIBs (DBS, UOB, OCBC) — size and regional footprint:
  - Three local D-SIBs accounted for approximately 52 percent of Singapore's banking sector assets in December 2024.
  - Regional loan portfolio shares (local D-SIBs, 2024Q4):
    - Singapore: 45 percent of total loans.
    - China (including Hong Kong SAR and Taiwan Province of China): 23 percent.
    - Asia and Pacific excluding China: 16 percent.
    - Rest of the world: 16 percent.
  - Currency composition (2024Q4):
    - About 61 percent of local D-SIBs’ loans and deposits were denominated in foreign currencies.
    - Loans denominated in U.S. dollars: about 22 percent of total loans.
    - Deposits denominated in U.S. dollars: about 34 percent of total deposits.
- FX derivatives and market context:
  - Singapore's foreign exchange derivatives market grew 45 percent since 2019 (BIS Triennial Central Bank Survey, 2022) and is the third largest globally.
  - Growth primarily driven by asset managers, bank treasurers, and corporate treasurers using FX swaps and cross-currency swaps.

### F. Singaporean banks’ extensive cross-border linkages imply distinct vulnerabilities
- Exposure to shocks:
  - Banks are exposed to global and regional macroeconomic shocks, a sharp tightening in global financial conditions entailing high global interest rates, shortage in U.S. dollar liquidity, and spillovers from banking sector stresses outside Singapore.
  - Given interconnectedness, these shocks could impact Singaporean banks and broader regional financial stability.
  - Singapore has weathered such shocks in the past relatively well (examples cited: the Global Financial Crisis, the onset of the COVID pandemic, and the banking turmoil in the U.S. and Europe in 2023).
  - Network exposure shares:
    - Singapore: 45%
    - China: 23%
    - Rest of Asia-Pacific: 16%
    - Rest of the World: 16%
- MAS stress tests and interbank contagion analysis:
  - MAS’s Industry-Wide Stress Test in November 2024 assessed resiliency of D-SIBs under an adverse scenario featuring intensification of geopolitical conflicts, trade tensions, and global inflationary pressures; the scenario entails a global recession affecting countries and regions on which D-SIBs have exposures, including China and other Asian economies amid elevated interest rates.
  - In the adverse scenario, D-SIBs’ CET1 capital adequacy ratio remains above the regulatory minimum of 9 percent (including the capital conservation buffer of 2.5 percent).
  - MAS 2024 Industry-Wide Stress Test also assessed resiliency against cross-border interbank contagion using a tail risk scenario of default of a single country’s banking sector; this triggers second-round shocks transmitted through counterparty country banking system defaults and funding liquidity stresses from the pullback of funding lines, triggering asset fire sales.
  - Results of the interbank contagion analysis suggest that D-SIBs can withstand such shocks in terms of capital and liquidity regulatory requirements.
  - Methodology and prior findings:
    - Stress tests draw on the network analysis framework developed by Espinosa-Vega and Solé (2010).
    - An earlier IMF staff analysis under the 2019 Financial Sector Assessment Program showed Singapore’s banks were most exposed to major advanced economies such as Japan, Hong Kong SAR, and the United States, while shocks originating in or transmitted through Singaporean banks would also affect banks in the ASEAN region.
- FX funding and liquidity resilience:
  - FX loan-to-deposit (LTD) ratio for Singaporean banks:
    - Declined from above 120 percent in 2019 to around 70 percent in 2024, reaching a level similar to the Singapore dollar LTD ratio.
  - FX liquidity coverage ratio (LCR) for three local D-SIBs:
    - Close to 100 percent in 2023 and 2024.
    - Overall LCRs are well above the regulatory requirement of 100 percent.
  - MAS supervisory actions supporting improved resilience against FX funding risks include:
    - Cashflow-based liquidity stress tests, indicating D-SIBs have sufficient FX liquidity buffers on a daily basis, against all currencies including the U.S. dollar.
    - Close engagement with banks to strengthen FX liquidity management and develop contingent FX funding plans.
    - Enhanced monitoring of key funding markets in coordination with central banks globally.
    - Efforts to further deepen and strengthen Singapore's FX market to serve growing trading and hedging needs in the region.
  - Note on data and coverage:
    - Loan to Deposit Ratio covers loans extended by the banking sector, excluding interbank lending.
    - Data has a structural break in July 2021 reflecting removal of DBU-ACU divide & revision of MAS 610/1003.

### G. Policy implications and conclusions
- Financial–trade asymmetry:
  - Asian economies’ trade integration is stronger than their financial integration would suggest.
- Trade–FDI linkage:
  - Strong empirical link: greater prior trade linkages predict higher bilateral FDI stocks (gravity model: lagged trade coefficient 0.005***, standard error 0.002).
  - A reconfiguration of supply chains could lead to redirection of FDI along similar lines.
  - FDI typically is more stable and slow-moving than portfolio flows, but escalating trade measures and prolonged trade policy uncertainty could affect FDI flows.
- Portfolio flows:
  - No robust relationship between prior trade linkages and portfolio asset allocations; portfolio investment network within Asia remains dominated by advanced economies.
- Singapore’s intermediary role and vulnerabilities:
  - Singapore plays a central role in advancing financial integration in Asia via FDI and banking intermediation.
  - Singaporean banks face cross-border and FX funding risks given large cross-border assets and liabilities, substantial foreign-currency denominated loans and deposits, and significant reliance on non-resident funding.
  - Continued efforts to mitigate these risks will be important for the region’s continued macro-financial stability.

*International Monetary Fund. Selected Issues Paper: Financial Interconnectedness in Asia and the Pacific—Recent Shifts and Implications for Singapore (June 23, 2025).*/*Source: sipea2025114 - 18.      Singaporean banks’ extensive cross-border linkages imply distinct vulnerabilities.*

### 1. Gravity Model Results on Trade and Financial Interconnectedness ___________________ 8

### 1. Gravity Model Results on Trade and Financial Interconnectedness

### A. Introduction and scope
- Paper objective: take stock of financial interconnectedness in Asia and through Singapore, and explore the link between trade and financial flows.
- Key framing:
  - Asia-Pacific GDP per capita more than doubled between 1990 and 2023.
  - The region's contribution to global GDP growth rose from approximately a quarter to nearly two-thirds (text statement).
  - Analysis uses international investment position (IIP), CDIS, CPIS, DOTS, network analysis (eigenvector centrality), and a modified gravity model.

### B. Asia’s financial integration with the rest of the world — main findings
- Aggregate shares and comparisons:
  - Asia and the Pacific make up over 30 percent of global trade and GDP, hold less than 30 percent of the total inward FDI stock, and make up less than 15 percent of global portfolio liabilities.
  - Asia’s share in global trade grew substantially in the late 2000s and early 2010s but has stabilized since then.
  - Asia’s share of global FDI has risen in recent years; share of global portfolio liabilities has been stable.
- Cross-border positions by country group:
  - Cross-border assets and liabilities in Asian advanced economies rose from around 100 percent of GDP in 1990 to over 500 percent in 2023.
  - Emerging market economies in the region: cross-border assets and liabilities as percent of GDP have remained relatively stable since the 1990s.
- Singapore’s role in bilateral FDI and portfolio claims:
  - About half of all FDI coming to Singapore is from either Europe or the United States.
  - The United States has become increasingly important as a source of FDI inflows to Singapore while the role of Europe has diminished.
  - Outbound FDI from Singapore is mostly destined to other parts of Asia.
  - On the portfolio side, about a quarter of portfolio investments is in U.S. assets, with China also playing an increasing role.
  - Portfolio liabilities for Singapore are small overall.

### C. Network analysis: trade, FDI, and portfolio investment networks
- Method: eigenvector centrality used to capture node influence across networks.
- Trade network (2023 snapshot and time evolution):
  - Chinese mainland rose since the 1980s; Japan declined in importance.
  - India, Hong Kong SAR, Singapore, and ASEAN included; Vietnam rose substantially.
  - Singapore’s centrality peaked in the late 1990s and has been on a slowly decreasing trend since.
- Direct investment (FDI) network:
  - Structure resembles the trade network closely.
  - Chinese mainland attracted substantial FDI; Japan’s relative decline visible.
  - Hong Kong SAR and Singapore have greater roles in the FDI network than in the trade network.
  - Singapore’s importance in the FDI network has grown steadily, having attracted significant FDI in recent years.
- Portfolio investment network:
  - Disconnected from trade and FDI networks.
  - Japan remains the biggest Asian holder of portfolio assets (slightly less dominant than in early 2000s), followed by Australia.
  - India and Chinese mainland increasing but remain small.
  - Singapore’s centrality broadly stable.
  - Overall, the portfolio assets network within Asia is dominated by advanced economies.

### D. Gravity model results — relationship between trade and financial exposures
- Model specification:
  - Modified gravity model with origin-time, destination-time, and origin-destination fixed effects (“fully saturated” specification).
  - Trade is included on the right-hand side and lagged by one year to address endogeneity.
  - Dependent variables: stocks of inward FDI and portfolio investments (assets/liabilities; debt/equity).
  - Data sources: CDIS (FDI), CPIS (portfolio), DOTS (trade).
- Main empirical findings:
  - Trade is a key driver for FDI but not for portfolio investments.
  - Baseline regression result (Table 1): coefficient for lagged trade when dependent variable is inward FDI = 0.005*** (standard error 0.002). Interpretation provided in text: a one percentage point increase in the bilateral trade relationship (as percent of average GDP) is associated with an increase in the FDI stock by approximately 0.5 percent.
  - Coefficient for lagged trade when using portfolio investment as dependent variable is insignificant for all types (assets/liabilities and debt/equity).
  - Findings robust to using shares rather than stocks and to including additional lags of the trade variable.
- Model fit metrics (reported in Table 1):
  - Observations vary by specification: 143,658; 156,872; 140,455; 119,888; 149,783; 135,842; 114,644.
  - Pseudo R2 reported per specification: 0.984, 0.993, 0.987, 0.994, 0.993, 0.987, 0.994.
  - Standard errors clustered by country-pair.

### E. Cross-border linkages of Singaporean banks — exposures and funding
- System-wide scale and role:
  - Singapore is an international financial center; banking sector assets totaled 512 percent of GDP in December 2024.
  - Singaporean banks function as an intermediary channeling capital between advanced economies and emerging Asian markets.
- Cross-border assets (December 2024):
  - Banks’ claims on non-residents: 116.6 percent of GDP, accounting for about 22 percent of total banking sector assets.
  - Composition of claims on non-residents:
    - Loans and advances including bills financing to non-residents: 67.4 percent of GDP or 12.8 percent of total banking system assets.
    - Securities and equities issued by private non-resident entities: 25.9 percent of GDP or 4.9 percent of total banking system assets.
    - Amounts due from non-resident banks: 23 percent of GDP or 4.4 percent of total banking system assets.
  - Time evolution: banks’ claims on non-residents declined from 141.3 percent of GDP in December 2021 to 116.6 percent of GDP in December 2024; loans to non-residents declined from 89.6 percent of GDP in December 2021 to 67.4 percent of GDP in December 2024.
- Cross-border liabilities and funding (December 2024):
  - Liabilities of the Singaporean banking system to non-residents: 194.4 percent of GDP, accounting for 36.8 percent of total banking sector liabilities.
  - Composition of liabilities:
    - Non-bank deposits by non-residents: 86.7 percent of GDP.
    - Amounts payable to non-resident banks, including interbank loans: 107.7 percent of GDP.
- Local D-SIBs (DBS, UOB, OCBC) — size and regional footprint:
  - Three local D-SIBs accounted for approximately 52 percent of Singapore's banking sector assets in December 2024.
  - Regional loan portfolio shares (local D-SIBs, 2024Q4):
    - Singapore: 45 percent of total loans.
    - China (including Hong Kong SAR and Taiwan Province of China): 23 percent.
    - Asia and Pacific excluding China: 16 percent.
    - Rest of the world: 16 percent.
  - Currency composition (2024Q4):
    - About 61 percent of local D-SIBs’ loans and deposits were denominated in foreign currencies.
    - Loans denominated in U.S. dollars: about 22 percent of total loans.
    - Deposits denominated in U.S. dollars: about 34 percent of total deposits.
- Additional context:
  - Singapore's foreign exchange derivatives market grew 45 percent since 2019 (BIS Triennial Central Bank Survey, 2022) and is the third largest globally; growth primarily driven by asset managers, bank treasurers, and corporate treasurers using FX swaps and cross-currency swaps (text statement).

### F. Concluding implications (synthesized from findings)
- Financial-trade asymmetry:
  - Asian economies’ trade integration is stronger than their financial integration would suggest (trade share > financial shares).
- Trade–FDI linkage:
  - Strong empirical link: greater prior trade linkages predict higher bilateral FDI stocks (gravity model: lagged trade coefficient 0.005***).
- Portfolio flows:
  - No robust relationship between prior trade linkages and portfolio asset allocations.
  - Portfolio investment network within Asia remains dominated by advanced economies.
- Singapore’s intermediary role and vulnerabilities:
  - Singapore plays a central role in advancing financial integration in Asia via FDI and banking intermediation.
  - Singaporean banks face cross-border and FX funding risks given large cross-border assets and liabilities, substantial foreign-currency denominated loans and deposits, and significant reliance on non-resident funding.
  - Authorities continue efforts to mitigate these risks (text statement).

*International Monetary Fund. Selected Issues Paper: Financial Interconnectedness in Asia and the Pacific—Recent Shifts and Implications for Singapore (June 23, 2025).*

### 18.      Singaporean banks’ extensive cross-border linkages imply distinct vulnerabilities.

### 18.      Singaporean banks’ extensive cross-border linkages imply distinct vulnerabilities.

### Exposure to shocks
- Banks in Singapore are exposed to global and regional macroeconomic shocks, a sharp tightening in global financial conditions entailing high global interest rates, shortage in U.S. dollar liquidity (negatively affecting U.S. dollar funding), and spillovers from banking sector stresses outside Singapore.
- Given interconnectedness, these shocks could impact Singaporean banks and broader regional financial stability.
- Singapore has weathered such shocks in the past relatively well (examples cited: the Global Financial Crisis, the onset of the COVID pandemic, and the banking turmoil in the U.S. and Europe in 2023).
- Network exposure shares (as presented):
  - Singapore: 45%
  - China: 23%
  - Rest of Asia-Pacific: 16%
  - Rest of the World: 16%

### MAS stress tests and interbank contagion analysis
- MAS’s Industry-Wide Stress Test in November 2024 assessed resiliency of D-SIBs under an adverse scenario featuring intensification of geopolitical conflicts, trade tensions, and global inflationary pressures; the scenario entails a global recession affecting countries and regions on which D-SIBs have exposures, including China and other Asian economies amid elevated interest rates.
- In the adverse scenario, D-SIBs’ CET1 capital adequacy ratio remains above the regulatory minimum of 9 percent (including the capital conservation buffer of 2.5 percent).
- MAS 2024 Industry-Wide Stress Test also assessed resiliency against cross-border interbank contagion using a tail risk scenario of default of a single country’s banking sector; this triggers second-round shocks transmitted through counterparty country banking system defaults and funding liquidity stresses from the pullback of funding lines, triggering asset fire sales.
- Results of the interbank contagion analysis suggest that D-SIBs can withstand such shocks in terms of capital and liquidity regulatory requirements.
- Methodology and prior findings:
  - Stress tests draw on the network analysis framework developed by Espinosa-Vega and Solé (2010).
  - An earlier IMF staff analysis under the 2019 Financial Sector Assessment Program showed Singapore’s banks were most exposed to major advanced economies such as Japan, Hong Kong SAR, and the United States, while shocks originating in or transmitted through Singaporean banks would also affect banks in the ASEAN region.

### FX funding and liquidity resilience
- FX loan-to-deposit (LTD) ratio for Singaporean banks:
  - Declined from above 120 percent in 2019 to around 70 percent in 2024, reaching a level similar to the Singapore dollar LTD ratio.
- FX liquidity coverage ratio (LCR) for three local D-SIBs:
  - Close to 100 percent in 2023 and 2024.
  - Overall LCRs are well above the regulatory requirement of 100 percent.
- MAS supervisory actions supporting improved resilience against FX funding risks include:
  - Cashflow-based liquidity stress tests, indicating D-SIBs have sufficient FX liquidity buffers on a daily basis, against all currencies including the U.S. dollar.
  - Close engagement with banks to strengthen FX liquidity management and develop contingent FX funding plans.
  - Enhanced monitoring of key funding markets in coordination with central banks globally.
  - Efforts to further deepen and strengthen Singapore's FX market to serve growing trading and hedging needs in the region.
- Note on data and coverage:
  - Loan to Deposit Ratio covers loans extended by the banking sector, excluding interbank lending.
  - Data has a structural break in July 2021 reflecting removal of DBU-ACU divide & revision of MAS 610/1003.

### Policy implications and conclusions
- Both the network analysis and the gravity model point to much stronger links between trade and FDI than between trade and portfolio flows.
- A reconfiguration of supply chains could lead to redirection of FDI along similar lines.
- FDI typically is more stable and slow-moving than portfolio flows, but escalating trade measures and prolonged trade policy uncertainty could affect FDI flows.
- Portfolio flows in Asia have not been associated with trade flows (per findings).
- As Singapore continues to play a significant role in advancing financial integration in Asia, Singaporean banks will remain exposed to cross-border and FX funding risks.
- Continued efforts to mitigate these risks will be important for the region’s continued macro-financial stability.

*Source: sipea2025114 - 18.      Singaporean banks’ extensive cross-border linkages imply distinct vulnerabilities.*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025114.pdf_