## _wp15211

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---

### Introduction: scope and key questions
- Focus: ASEAN-5: Indonesia, Malaysia, the Philippines, Singapore, and Thailand.
- Three main questions:
  - How has the expanded global liquidity been transmitted to ASEAN-5?
  - How have the financial landscapes changed in ASEAN-5?
  - What are the financial stability implications for ASEAN-5?
- Main conclusion: global liquidity transmission and changing financial landscapes have contributed to changes in risks to financial stability in ASEAN-5.

### Key empirical findings and trends
- Global liquidity and official/private proxies:
  - Money supply of the G4 rose from US$ 18 trillion in 2003 to US$ 35 trillion in 2014.
  - Foreign exchange reserves increased from US$ 3.2 trillion in 2003 to over US$ 12 trillion in 2014.
  - International debt security issuance by emerging markets rose from US$ 638 billion in 2003 to US$ 2.6 trillion in 2014.
  - External loans and deposits to emerging markets rose from US$ 734 billion in 2003 to US$ 3.1 trillion in 2014.
- Expanded central bank balance sheets (examples):
  - Federal Reserve’s assets grew from US$ 925 billion in 2007 to US$ 4.5 trillion in 2014.
  - ECB’s assets grew from US$ 2.2 trillion in 2007 to US$ 2.7 trillion in 2014.
  - Bank of Japan’s assets grew from US$ 1 trillion in 2007 to US$ 2.5 trillion in 2014.
- Broader private liquidity trends:
  - External loans and deposits: US$ 10 trillion in 2003 to US$ 21 trillion in 2014.
  - International debt security issuance: US$ 6.8 trillion in 2003 to US$ 23 trillion in 2014.
  - Cross-border credit to Asia: US$ 100 billion in 2003 to US$ 600 billion in 2014.
- Transmission to ASEAN-5 (2003–2014):
  - Net portfolio investment: moved to inflows of US$ 4 billion in 2010 from outflows of US$ 45 billion in 2007 (ASEAN-5); excluding Singapore, ASEAN-4 increased from US$ 3 billion in 2007 to US$ 33 billion in 2010.
  - External bank loans and deposits to ASEAN-5: rose from US$ 284 billion in 2003 to US$ 787 billion in 2014.
  - International debt security issuance by ASEAN-5: rose from US$ 86 billion in 2003 to US$ 288 billion in 2014.
  - Country patterns:
    - Thailand: big increases in external loans and international debt security issuance in 2010−2014.
    - Malaysia: big increases in external loans and international debt security issuance in 2003−2014.
    - Indonesia and Singapore: increases in external loans in 2003−08 and international debt security issuance in 2010−2014.
- Changing financial landscapes and nonbank expansion (2006–2013):
  - Singapore: nonbanks’ asset-to-GDP ratio increased from less than 100 percent in 2006 to 120 percent in 2013; non-commercial-bank short-term funding share rose from 22 percent in 2006 to 24 percent in 2012, then declined a bit in 2013.
  - Thailand: non-commercial-banks’ asset-to-GDP ratio rose from 13 percent in 2006 to 21 percent in 2013; non-commercial-bank assets as share of total financial institution assets grew from 10 percent in 2006 to 14 percent in 2013.
  - Indonesia: nonbanks’ asset-to-GDP ratio rose from less than three percent in 2006 to five percent in 2013; non-commercial-bank assets share grew from six percent in 2006 to nine percent in 2013.
  - Malaysia: nonbanks’ asset-to-GDP ratio around 26−28 percent during 2011 and 2013; shares of nonbank assets, credit, and liquidity declined during 2011 and 2013.
  - Philippines: nonbanks’ asset-to-GDP ratio around 10 percent during 2006 and 2013; shares of nonbank assets, credit, and liquidity declined since 2011.
- Aggregate credit and deviation from trend (2014 examples):
  - Thailand: commercial bank credit-to-GDP ≈ 121 percent in 2014; deviation from trend ≈ 20 percent. Including nonbank credit, all financial institution credit-to-GDP ≈ 173 percent; deviation from trend ≈ 36 percent.
  - Malaysia: commercial bank credit-to-GDP ≈ 131 percent in 2014; deviation from trend ≈ 11 percent. Including nonbank credit, all financial institution credit-to-GDP ≈ 143 percent; deviation from trend ≈ 13 percent.
- Heterogeneity subgrouping by financial development:
  - Low: Indonesia and the Philippines.
  - Middle: Malaysia and Thailand.
  - High: Singapore.

### Econometric evidence on liquidity transmission (panel monthly Jan 2003–Jun 2015)
- Dependent variables approximating transmission and stability:
  - Foreign Exchange Reserve (proxy for official liquidity).
  - External Loans and Deposits (BIS locational banking statistics Table 7A – 7B).
  - Equity Return (local currencies).
  - Financial Stress Index.
- Explanatory groups:
  - Domestic/fundamental factors: economic growth, real exchange rate, growth in money supply (M2), inflation, crisis dummy.
  - Global factors: global liquidity (growth rates of broad money in the euro area, Japan, the United Kingdom and the United States) and VIX (implied volatility on the S&P 500).
- Key panel fixed-effects estimates (lagged global liquidity coefficient and select controls):
  - Global Liquidity (1 lag):
    - Foreign Exchange Reserve: 1.469*** (t-statistic 19.870).
    - External Loans and Deposits: 5.469*** (t-statistic 6.748).
    - Equity Return: 0.824*** (t-statistic 7.273).
    - Financial Stress Index: 1.568*** (t-statistic 3.157).
  - VIX:
    - Foreign Exchange Reserve: 0.002***.
    - Equity Return: -0.005***.
  - M2 (1 lag):
    - Foreign Exchange Reserve: 0.169***.
    - External Loans and Deposits: -2.261***.
  - Real exchange rate (1 lag): positive and significant across dependent variables (examples: 1.017*** for Foreign Exchange Reserve; 2.320*** for External Loans and Deposits; 1.081*** for Equity Return; 1.604*** for Financial Stress Index).
  - Crisis dummy: -0.125*** for Foreign Exchange Reserve; -0.400*** for Equity Return.
- Model fit and sample:
  - Adjusted R-squared: 0.204 (Foreign Exchange Reserve), 0.097 (External Loans and Deposits), 0.860 (Equity Return), 0.268 (Financial Stress Index).
  - Monthly sample Jan 2003–June 2015; No. of cross-section 5; No. of observations varied by regression (750, 735, 750, 715).
- Interpretation:
  - Global liquidity supports foreign exchange reserves, capital inflows, and equity prices in ASEAN-5, but is also associated with higher financial stress.

### Financial stability implications and risk mapping (Section V)
- Increasing risks identified:
  - Booming cross-border financial flows and rapid credit growth have increased risks to financial stability.
  - Indicators and channels:
    - Yield spread compression reflecting increased risk appetite.
    - Rapid credit expansion to corporate and household sectors; declining nonfinancial corporate debt-to-equity ratios warrant attention.
    - Household debt-to-GDP ratios have risen rapidly in Thailand and Malaysia.
      - Footnote: "More than two thirds of household loans in Thailand were used for consumption (including purchases of cars and other durables), farming, and business, with the remainder used to buy real estate and land. And some of the increased household loans were policy-induced after the 2007–08 global financial crisis, including those from specialized financial institutions. However, mitigating the risks are strong financial buffers, with household financial assets at about twice the level of household debt."
    - Growing nonbanks with increasing interconnectedness to the financial sector and real economy.
    - Liquidity risk from expected U.S. interest rate increases; historical example: Thailand experienced a sharp decline in international debt security issuance following Federal Reserve rate increases in the late 1990s.
    - Exchange rate risk from high shares of foreign currency borrowing by nonfinancial corporates in the Philippines and Indonesia; Thailand saw increased foreign currency borrowing in 2012 but lower shares in 2013 and 2014.
- Country Financial Stability Map (CFSM) comparative results (2007Q4 vs 2014Q4):
  - Malaysia, Singapore, and Thailand show larger increases in risks to financial stability.
  - Country-specific main contributors to increased risks:
    - Indonesia: increased market and liquidity risk due to lower stock market liquidity and higher foreign liabilities of the banking sector.
    - Malaysia: increased macroeconomic risk, credit risk, and market and liquidity risk driven by rapid household debt growth.
    - Philippines: increased risk in monetary and financial conditions due to rapid bank credit growth; need to strengthen monitoring of bank credit quality and consider capital injections when necessary.
    - Singapore: increased monetary and liquidity risk due to domestic credit growth; healthy domestic funding position suggests banking system resilience.
    - Thailand: increased credit risk, macroeconomic risk, and market and liquidity risk due to slower trade growth, higher foreign liabilities of the banking sector, and household debt; vulnerabilities in nonbanks and SFIs amplify transmission risks.
  - CFSM visualization: increased outward distance from center across identified risk categories between 2007Q4 and 2014Q4, indicating higher risks, easier monetary and financial conditions, or higher risk appetite.

### Policy implications and recommendations
- General preparedness for U.S. monetary policy normalization and liquidity tightening:
  - Consider the full liquidity cycle, including surges and shortages of private liquidity.
  - Continue exchange rate flexibility to help dampen global liquidity spillovers.
  - Be ready to provide liquidity when global liquidity shortages materialize; adjust macroprudential policies as market conditions change.
  - Strengthen regulatory frameworks to mitigate private liquidity surges and associated credit and asset price booms.
- Strengthening regulation on nonbanks:
  - Enlarge regulatory perimeter and closer supervision of nonbanks to avoid regulatory arbitrage.
  - Contain rapid household leverage growth associated with nonbanks; example actions by BNM and BOT include calibrated macroprudential measures to reduce household debt risks.
- Improve and formalize financial stability frameworks (country examples):
  - Malaysia: Financial Stability Executive Committee; enhanced framework for risk-based pricing, stress testing, enhanced supervision, and targeted macroprudential policies addressing household indebtedness.
  - Indonesia: Basel III implementation starting early 2014; Otoritas Jasa Keuangan (OJK) created by the Law on the Financial Services Authority of 2011; inter-agency Forum of Financial System Stability Coordination; draft Financial System Safety Net law to close crisis management gaps.
  - Thailand: Financial Stability Committee within BOT; published Financial Stability Reports; selected credit-related and capital-related macroprudential policies since 2003; inclusion of savings and credit cooperatives in national credit bureau encouraged.
  - Singapore: institutional framework for systemic liquidity management, safety nets and contingency planning; pioneer in macroprudential policies (housing, car loans, credit cards, unsecured consumer credit); measures to convert large retail branches into domestically incorporated subsidiaries and push for international supervisory information sharing.
  - Philippines: proposed law to broaden BSP regulatory perimeter to include nonbanks; established Financial Sector Forum (FSF) and Financial Stability Coordination Council (FSCC); monetary policy actions in 2014 to safeguard price and financial stability; steps taken in 2014 to address accelerated credit growth and domestic asset price booms.
- Further recommended measures for ASEAN-5 policymakers:
  - Be prepared to take and fine-tune macroprudential policies; ensure explicit mandate and willingness to act even when measures are unpopular.
  - Strengthen data collection on banks, nonbanks, financial sector–real economy linkages, and cross-border exposures.
    - Philippines: close data gaps including real estate price and nonbank activity data.
    - Malaysia: collect granular data on household assets and liabilities.
  - Enhance coordination and information sharing among regulators within and across jurisdictions; review protocols for information sharing and policy coordination.

*Source — _wp15211 (excerpts provided in the supplied content)*

### 1. Expanding Central Bank Assets .......................................................................................

### 1. Expanding Central Bank Assets

### Introduction: scope and key questions
- Paper focuses on ASEAN-5: Indonesia, Malaysia, the Philippines, Singapore, and Thailand.
- Three main questions:
  - How has the expanded global liquidity been transmitted to ASEAN-5?
  - How have the financial landscapes changed in ASEAN-5?
  - What are the financial stability implications for ASEAN-5?
- Main conclusion: global liquidity transmission and changing financial landscapes have contributed to changes in risks to financial stability in ASEAN-5.

### Key empirical findings and trends (Introduction)
- Money supply of the G4 (the United States, the United Kingdom, Euro Area, and Japan)—a proxy for global liquidity—rose from US$ 18 trillion in 2003 to US$ 35 trillion in 2014.
- Foreign exchange reserves—a proxy for official liquidity—increased four-fold from US$ 3.2 trillion in 2003 to over US$ 12 trillion in 2014.
- International debt security issuance by emerging market—a proxy for private liquidity—increased four-fold from US$ 638 billion in 2003 to US$ 2.6 trillion in 2014.
- External loans and deposits to emerging markets—another proxy for private liquidity—increased four-fold from US$ 734 billion in 2003 to US$ 3.1 trillion in 2014.
- Near-zero policy rates and large asset purchases by the Federal Reserve and other major central banks have boosted asset prices and fueled investor appetite for risk.
- Expected normalization of U.S. monetary policy raises concerns about a possible global liquidity crunch and capital flow reversal.
- ASEAN-5 have experienced strong evidence of increases in international debt security issuance and external loans and deposits.
- Nonbank financial institutions have developed quickly in ASEAN-5, notably in Thailand and Indonesia (albeit from a relatively low base).
- Some ASEAN-5, especially Thailand and Malaysia, have seen larger increases in financial vulnerability, as evidenced by increasing household debt.
- The global financial market volatility associated with expected Federal Reserve tightening may expose some economies to credit, liquidity, and exchange rate risks.

### Policy implications and recommendations (Introduction / Conclusion-oriented)
- Authorities should seriously consider measures to prevent external and domestic shocks from severely damaging financial stability in ASEAN-5, including:
  - Further improving a comprehensive financial stability framework to monitor systemic risk.
  - Considering macroprudential policies tailored to evolving cross-border financial flows and changing financial landscapes.

### Literature review — relevant concepts and mechanisms
- Global liquidity:
  - BIS (2011) distinguishes official liquidity (provided ultimately by central banks) and private liquidity (created largely through cross-border operations of banks and other financial institutions).
  - IMF (2014a) defines global liquidity operationally as factors that drive supply of funding from international financial centers; drivers include nature and composition of investors, financial innovation, general risk appetite, balance sheets of global financial and nonfinancial entities, and policy settings in key economies.
  - Shin (2012): two phases of global liquidity — pre-2008 banking-centered phase; post-2010 bond-market-centered phase with "reach for yield" and explosion in international debt security issuance.
  - He and McCauley (2013): transmission channels include lower bond yields in major markets being transmitted to integrated local currency bond markets.
  - Empirical studies link G-4 liquidity expansion to higher asset prices, reserve accumulation, and equity portfolio inflows in liquidity-receiving economies.
- Risks from global liquidity volatility:
  - Capital flow and exchange rate volatility can harm macroeconomic stability via real and financial-sector channels (IMF, 2014b).
  - Rapid inflows and currency appreciation can lead to domestic credit booms and increased use of foreign-denominated liabilities, creating balance-sheet vulnerabilities.
- Shadow banking and nonbank development:
  - Definitions vary; FSB: “credit intermediation involving entities and activities outside the regular banking system.” IMF (2014c): shadow banking as financial intermediaries or activities involved in credit intermediation outside the regular banking system, lacking a formal safety net; also an “activity” concept based on nontraditional (noncore) funding.
  - Drivers of shadow banking growth: tightening banking regulation, ample liquidity conditions, and demand from institutional investors.
  - Shadow banking can complement traditional banking (expanding credit access, supporting market liquidity, maturity transformation, risk sharing) but may carry bank-like risks.

### Financial stability assessment approaches (Literature)
- Early-warning indicator models for discrete crises (e.g., Kaminsky, Lizondo, and Reinhart, 1998).
- Composite indices and financial stress indices (e.g., Illing and Liu, 2003; Van den End, 2006; Hadad and others, 2007).
- Broader vulnerability mapping (Bank of England approach focusing on probability and impact of key threats; IMF Global Financial Stability Map; Country Financial Stability Map to link multilateral and country-specific risks).

### Global liquidity transmission — evidence (start of Section III)
- Global liquidity, both official and private, has been expanding rapidly since the early 2000s.
- The balance sheets of central banks in the G4—Japan, the Euro Area, the United Kingdom, and the United States—have been growing rapidly since the global financial crisis. For example, the Federal Reserve’s assets grew from US$ 925 billion in 2007 to US$ [text truncated in source].

*Italic: Source — _wp15211 - 1. Expanding Central Bank Assets (excerpts provided in the supplied content)*

### 4.5 trillion in 2014. While growing

### 4.5 trillion in 2014. While growing

### Global liquidity expansion and central bank balance sheets
- ECB’s assets: grew from US$ 2.2 trillion in 2007 to US$ 2.7 trillion in 2014; expected to grow faster along with ECB’s quantitative easing in March 2015.  
- Bank of Japan’s assets: grew from US$ 1 trillion in 2007 to US$ 2.5 trillion in 2014.  
- Aggregate central bank-related money supply in the G4: grew from US$ 18 trillion in 2003 to US$ 35 trillion in 2014, though slowing in growth in 2014.  
- Foreign exchange reserves (a core component of official liquidity): increased rapidly in the last decade; China and other emerging markets accounted for two-thirds of international reserves, although reserves fell a bit in 2014 after many years of increase.  
- Private liquidity (proxied by international debt security issuance and external loans and deposits):  
  - External loans and deposits: doubled from US$ 10 trillion in 2003 to US$ 21 trillion in 2014.  
  - International debt security issuance: tripled from US$ 6.8 trillion in 2003 to US$ 23 trillion in 2014.  
- Cross-border credit to Asia: increased six-fold from US$ 100 billion in 2003 to US$ 600 billion in 2014, though slowing in growth in 2014.

### Transmission to ASEAN-5: capital flows and funding
- Portfolio inflows: net portfolio investment in ASEAN-5 moved to inflows of US$ 4 billion in 2010 from outflows of US$ 45 billion in 2007; Federal Reserve tapering talk and associated market turmoil were associated with net portfolio outflows in 2013 and 2014.  
  - Note: If Singapore is excluded, net portfolio investment to ASEAN-4 increased from US$ 3 billion in 2007 to US$ 33 billion in 2010.  
- External bank loans and deposits to ASEAN-5: rose from US$ 284 billion in 2003 to US$ 787 billion in 2014.  
  - Country timing differences: Indonesia and Singapore saw rapid increases in external loans and deposits in 2003−2008; Thailand’s external bank loans and deposits doubled between 2010 and 2014; Malaysia saw an increase over 2003−2014 despite a temporary drop in 2009.  
- International debt security issuance by ASEAN-5: rose three-fold from US$ 86 billion in 2003 to US$ 288 billion in 2014.  
  - All ASEAN-5 saw a doubled expansion in international debt security issuance in the period 2010−2014.  
- Summary of country patterns (2003−2014):  
  - Thailand: big increases in external loans and international debt security issuance in 2010−2014.  
  - Malaysia: big increases in external loans and international debt security issuance in 2003−2014.  
  - Indonesia and Singapore: increases in external loans in 2003−08 and international debt security issuance in 2010−2014.

### Econometric study on liquidity transmission to ASEAN-5 (panel monthly Jan 2003–Jun 2015)
- Purpose: estimate impact of global liquidity on liquidity transmission, capital flows, and financial stability for ASEAN-5.  
- Dependent variables approximations:  
  - Liquidity transmission: foreign exchange reserves (proxy for official liquidity).  
  - Capital flows: external loans and deposits (BIS locational banking statistics Table 7A – 7B).  
  - Financial stability: equity returns (local currencies) and financial stress index.  
- Explanatory variable groupings:  
  - Domestic/fundamental factors: economic growth, real exchange rate, growth in money supply (M2), inflation (consumer prices), crisis dummy for the global financial crisis.  
  - Global factors: (i) global liquidity defined as growth rates of broad money in the euro area, Japan, the United Kingdom and the United States; (ii) market risk premium proxied by the implied volatility of the at-the-money option on the S&P 500 index (VIX).  
- Key econometric findings (Fixed-Effects Panel Least-Square Estimation, monthly Jan 2003–Jun 2015, ASEAN-5):  
  - Global Liquidity (1 lag) coefficients (statistical significance indicated):  
    - Foreign Exchange Reserve: 1.469*** (t-statistic 19.870) — global liquidity is positively associated with foreign exchange reserves.  
    - External Loans and Deposits: 5.469*** (t-statistic 6.748) — global liquidity has a significant impact on external loans and deposits.  
    - Equity Return: 0.824*** (t-statistic 7.273) — global liquidity positively associated with equity returns; effect of global liquidity is three times as large as that of domestic liquidity.  
    - Financial Stress Index: 1.568*** (t-statistic 3.157) — global liquidity is positively associated with financial stress.  
  - Other notable coefficients (showing sign and significance):  
    - VIX: 0.002*** for Foreign Exchange Reserve; -0.005*** for Equity Return.  
    - M2 (1 lag): 0.169*** for Foreign Exchange Reserve; -2.261*** for External Loans and Deposits.  
    - Real exchange rate (1 lag): positive and significant across dependent variables (e.g., 1.017*** for Foreign Exchange Reserve; 2.320*** for External Loans and Deposits; 1.081*** for Equity Return; 1.604*** for Financial Stress Index).  
    - Crisis dummy: -0.125*** for Foreign Exchange Reserve; -0.400*** for Equity Return.  
  - Adjusted R-squared reported by dependent variable: 0.204 (Foreign Exchange Reserve), 0.097 (External Loans and Deposits), 0.860 (Equity Return), 0.268 (Financial Stress Index).  
  - Sample and observations: Monthly sample Jan 2003–June 2015; No. of cross-section 5; No. of observations varied by regression (750, 735, 750, 715).  
- Interpretation: global liquidity transmitted to ASEAN-5 supports foreign exchange reserves, capital inflows (external loans and deposits), and equity prices, but is also associated with higher financial stress.

### Changing financial landscapes in ASEAN-5
- Nonbank growth and structure (2006–2013): nonbanks include securities firms, leasing companies, credit card companies, invest and trust companies, finance companies, asset management companies, investment banks, specialized government credit institutions, and other nonbank credit institutions.  
  - Singapore: nonbanks’ asset-to-GDP ratio increased from less than 100 percent in 2006 to 120 percent in 2013. Non-commercial-bank short-term funding as a share of total funding of all financial institutions grew from 22 percent in 2006 to 24 percent in 2012, and declined a bit in 2013.  
  - Thailand: excluding specialized financial institutions, non-commercial-banks’ asset-to-GDP ratio increased from 13 percent in 2006 to 21 percent in 2013; non-commercial-bank assets as a share of total assets of all financial institutions grew from 10 percent in 2006 to 14 percent in 2013.  
  - Indonesia: nonbanks’ asset-to-GDP ratio increased from less than three percent in 2006 to five percent in 2013; non-commercial-bank assets as share of total assets grew from six percent in 2006 to nine percent in 2013.  
  - Malaysia: nonbanks’ asset-to-GDP ratio remained around 26−28 percent during 2011 and 2013; shares of nonbank assets, credit, and liquidity declined during 2011 and 2013.  
  - Philippines: nonbanks’ asset-to-GDP ratio remained around 10 percent during 2006 and 2013; shares of nonbank assets, credit, and liquidity declined since 2011.  
- Impact on aggregate credit measures and deviation from trend (example calculations for 2014):  
  - Thailand: commercial bank credit-to-GDP ratio about 121 percent in 2014; deviation from trend (average 2000–2014) about 20 percent. Including credit by nonbanks, all financial institution credit-to-GDP ratio would increase to 173 percent, and deviation from the trend would be 36 percent.  
  - Malaysia: commercial bank credit-to-GDP ratio about 131 percent in 2014; deviation from trend about 11 percent of GDP. Including credit by nonbanks, all financial institution credit-to-GDP ratio would increase to 143 percent, and deviation from the trend would be 13 percent.  
- Heterogeneity within ASEAN-5 and subgrouping by financial development level:  
  - Low level: Indonesia and the Philippines.  
  - Middle level: Malaysia and Thailand.  
  - High level: Singapore.  
- Implication: wide dispersion of credit-to-GDP ratios, international debt securities, and external loans and deposits implies differing vulnerabilities and financial-stability risks across ASEAN-5, necessitating subgroup-aware analysis.

*Italic: Source: _wp15211 - 4.5 trillion in 2014. While growing (PDF chapter/section, canonical URL provided in content unit).*

### section V.

### V. FINANCIAL STABILITY IMPLICATIONS FOR ASEAN-5

### A. Increasing Risks in ASEAN-5
- Global liquidity transmission and changes in financial landscapes have led to increasing risks to financial stability in ASEAN-5, driven by booming cross-border financial flows and rapid credit growth.
- Indicators and channels of increased risk:
  - Increases in risk appetite and accommodative monetary and financial conditions, as evidenced by the yield spread compression (Figure 13).
  - Rapid credit expansion to both corporate and household sectors.
    - Declining after 2007, nonfinancial corporate debt-to-equity ratios in ASEAN-5 warrant attention (Figure 14).
    - Household debt-to-GDP ratios in Thailand and Malaysia have risen rapidly, indicating potential credit risk (Figure 15).
      - Footnote: "More than two thirds of household loans in Thailand were used for consumption (including purchases of cars and other durables), farming, and business, with the remainder used to buy real estate and land. And some of the increased household loans were policy-induced after the 2007–08 global financial crisis, including those from specialized financial institutions. However, mitigating the risks are strong financial buffers, with household financial assets at about twice the level of household debt."
  - Growing nonbanks: nonbanks became increasingly important players in ASEAN-5, with growing interconnectedness with other parts of financial sector and real economy.
  - Increasing liquidity risk: expected increases in U.S. interest rates could trigger liquidity risk; easing financial conditions supported by global liquidity transmission run the risk of less capital inflows if the U.S. interest rate increases. Example: Thailand in the late 1990s, when the Federal Reserve raised interest rates, led to a sharp decline in international debt security issuance (Figure 16).
  - Emerging exchange rate risk: high share of foreign currency borrowing by nonfinancial corporates in several ASEAN-5 economies raises exchange rate risk.
    - Shares of foreign currency borrowings in total borrowings have been quite high since 2007 in the Philippines and Indonesia.
    - Thailand witnessed an increase in the rate of foreign currency borrowings in 2012; the share of foreign currency borrowings in total borrowings in Thailand declined in 2013 and 2014, indicating a lower exchange rate risk (Figure 17).

### B. Mapping Financial Stability for ASEAN-5
- Methodology and scope:
  - The Country Financial Stability Map (CFSM) is adapted from the Global Financial Stability Map (GFSM) and captures macroeconomic, credit, market and liquidity risks, plus risk appetite and monetary and financial conditions for individual countries over two specified periods.
  - The CFSM complements the GFSM by mapping country-level macro-financial risks and juxtaposing individual-country against corresponding global developments.
- Comparative results (summary):
  - Malaysia, Singapore, and Thailand appear to have seen larger increases in risks to financial stability (Figure 18).
  - Main contributors to increased risks by country:
    - Indonesia:
      - Increased market and liquidity risk mainly due to lower stock market liquidity and higher foreign liabilities of the banking sector.
      - Normalization of U.S. monetary policy and associated liquidity tightening may create pressure on market liquidity.
    - Malaysia:
      - Increased macroeconomic risk, credit risk, and market and liquidity risk in the past six years mainly due to rapid growth in household debt.
      - Global recovery uncertainties and slower domestic export growth could result in lower GDP growth, higher credit risk (particularly household debt), and higher market and liquidity risk.
    - Philippines:
      - Increased risk in monetary and financial conditions mainly due to rapid growth in bank credit.
      - Authorities may need to strengthen monitoring of bank credit quality and consider capital injection when necessary.
    - Singapore:
      - Increased risk in monetary and liquidity risk mainly due to growth in domestic credit.
      - Normalization of U.S. monetary policy may tighten market and liquidity conditions, but a healthy domestic funding position suggests the banking system would likely be able to continue lending to non-bank borrowers and support the Singapore economy even if global financial conditions tightened suddenly (Monetary Authority of Singapore, 2014).
    - Thailand:
      - Increased credit risk, macroeconomic risk, and market and liquidity risk mainly due to slower trade growth, higher foreign liabilities of the banking sector, and household debt.
      - A surge in global financial market volatility could transmit to domestic macroeconomic and credit risks, particularly given vulnerabilities in nonbanks and SFIs and growing linkages between cross-border financial flows and domestic credit.
- Visual diagnostics:
  - CFSM displays increased outward distance from center for the identified risk categories between 2007Q4 and 2014Q4, indicating higher risks, easier monetary and financial conditions, or higher risk appetite (Figure 18).

*Source: _wp15211 - section V.*

### 1. Macroeconomic risks

### 1. Macroeconomic risks

### Main findings
- The transmission of global liquidity to ASEAN-5 occurred through manifold channels, including both prices and quantities. Prices were reflected in the declining bond yields and quantities were reflected in growing international debt security issuance and external loans and deposits.
- Financial landscapes in ASEAN-5 have been changing, particularly in Thailand, Singapore, and Indonesia, as evidenced by the expansion of the financial sector, and in particular, the development of nonbanks.
- Risks to financial stability seem to be emerging in ASEAN-5 economies:
  - Indonesia, Malaysia and Thailand witnessed increases in foreign liabilities of banking sector.
  - Malaysia and Thailand experienced rapid increases in household debt.
- Global liquidity has a pronounced cyclical nature, subject to occasional adverse shocks. The eventual tightening of global financial conditions may not plunge ASEAN-5 into an outright crisis, but it does carry risks. The expected volatility in global financial conditions may present challenges for ASEAN-5.

### Policy implications — prepare for U.S. monetary policy normalization and liquidity tightening
- Consider the full liquidity cycle – liquidity surges and their associated contributions to systemic risk as well as liquidity shortages or disruptions in the provision of private liquidity.
- Continue with exchange rate flexibility to be consistent with domestic macroeconomic objectives, dampening global liquidity spillovers. In the past decade, the authorities have taken flexible exchange rate as a buffer to withstand external shocks, including global liquidity expansion. With expected global liquidity tightening arising from the normalization of U.S. monetary policy, ASEAN-5 would benefit from continuing with exchange rate flexibility.
- Take and adjust measures to provide liquidity when global liquidity shortages actually materialize. For instance, being a financial center, Singapore should remain vigilant against risks arising from exit from unconventional monetary policies in the United States and stand ready to adjust macroprudential policies in light of changes in market conditions and continue to monitor risks arising from the global liquidity condition.
- Mitigate global private liquidity surges and cycles and their associated credit and asset price surges, such as through strengthened regulatory frameworks.

### Strengthening regulation on nonbanks
- Enlarge financial regulatory perimeters, with closer supervision of nonbanks to avoid regulatory arbitrage. Some countries have strengthened regulation on non-commercial banks. For instance, Thailand plans to extend the Bank of Thailand (BOT)’s supervisory and regulatory mandate to specialized financial institutions and encourages them to adopt an operational plan swiftly. However, since nonbanks are sometimes subject to weak supervision and limited safety net supports, policymakers should continue to expand its advanced regulatory perimeter on commercial banks to nonbanks.
- Contain the rapid growth of household leverage, particularly those associated with nonbanks. For instance, Bank Negara Malaysia (BNM) and BOT along with the fiscal authorities have gradually introduced carefully calibrated macroprudential measures to reduce risks assoicated with household debt, including those provided by nonbanks.

### Improve and formalize financial stability frameworks
- ASEAN-5 authorities have taken steps and made progress; further improvement of a formal and transparent financial stability framework is recommended.
- Malaysia:
  - Set up Financial Stability Executive Committee, chaired by the Governor of the central bank; members include a Deputy Governor of the central bank, the Secretary General to the Treasury, Chairman of Securities Commission, Chief Executive Officer of the Malaysia Deposit Insurance Corporation and up to two independent professionals. This setup allows for other supervisory agencies and external experts to participate in the decision-making committee.
  - Introduced an enhanced framework for risk-based pricing and used stress testing, enhanced supervision, and targeted macroprudential policies to deal with rising household indebtedness. These efforts have reduced risks from credit growth and house price increases and also increased the resilience of the banking system, as evidenced by slowing down of personal credit growth and reduction in both loan applications and approvals.
- Indonesia:
  - Banks began to implement Basel III capital standards in early 2014, with larger banks expected to adopt a liquidity coverage ratio requirement in 2016.
  - The Law on the Financial Services Authority of 2011 created Otoritas Jasa Keuangan (OJK) to regulate and supervise banking, capital markets, insurance, pension funds, and other financial institutions. The OJK law also retained Bank Indonesia’s responsibilities in macroprudential policies, and created the inter-agency Forum of Financial System Stability Coordination as a key component of the financial stability framework.
  - Progress is being made to close gaps in the crisis management framework through a draft Financial System Safety Net law.
- Thailand:
  - Placed high priority on strengthening financial stability work, including monitoring, mitigating, and managing systemic risks.
  - Published Financial Stability Reports and established a Financial Stability Committee within the BOT tasked with systemic risk monitoring and mitigation. The committee is composed of high-level executives from relevant departments such as monetary policy, financial market operations, financial institutions policy, banking supervision, and others.
  - Adopted selected credit-related and capital-related macroprudential policies since 2003. The BOT encourages savings and credit cooperatives to include their clients in the national credit bureau database to strengthen financial surveillance.
- Singapore:
  - Developed an institutional framework for financial stability covering systemic liquidity management, safety nets and contingency planning.
  - A pioneer in the use of macroprudential policies to moderate financial stability risks. The Monetary Authority of Singapore (MAS) focused on vulnerabilities arising from capital flows, credit growth, and asset prices. Macroprudential measures have been taken on housing market, car loans, credit cards, and other unsecured consumer credit facilities. These measures appeared to be effective in slowing asset price increases and making lending more prudent.
  - Sought to address potential spillovers from other major financial centers by converting large retail branches operating in the domestic market into domestically incorporated subsidiaries, and by pressing in international fora for greater sharing of supervisory information on global systemically important financial institutions.
- Philippines:
  - Proposed a law for congress to discuss to broaden the Bangko Sentral ng Pilipinas (BSP)’s regulatory perimeter to include nonbanks.
  - Established two external committees — the Financial Sector Forum (FSF) and Financial Stability Coordination Council (FSCC). The FSF aims to harmonize financial regulations and address regulatory gaps, while the FSCC aims to identify, manage and mitigate the build-up of systemic risks.
  - Monetary policy was implemented in 2014 to help safeguard price and financial stability.11
  - Took steps in 2014 to address the acceleration in credit growth and the risks associated with domestic asset price booms.12

### Further recommended measures for ASEAN-5 policymakers
- Be prepared to take and fine-tune macroprudential policies to strengthen financial stability. Policymakers must have an explicit mandate to act when needed—and the courage to act even when measures are highly unpopular. For instance, Malaysian authorities may continue to employ macroprudential policies and review their effectiveness to dampen financial risks, such as those from rapid credit growth to households and continue to enhance monitoring, and MAS should stand ready to recalibrate macroprudential tools in line with changes in market conditions using a targeted approach.
- Strengthen data collection to monitor the build-up of financial stability risks. Authorities need to strengthen efforts to collect data on various components and interlinkages between banks and nonbanks, financial sector and real economy, and domestic and global economy. A sufficient set of data would help identify linkages among sectors and provide room for policymakers to take prompt action to mitigate financial stability risks. Examples:
  - Philippines would benefit from closing data gap, including real estate price and nonbank activities.
  - Malaysian authorities should continue monitoring risks through collection of granular data on household assets and liabilities.
- Enhance coordination and information sharing among regulators within and across jurisdictions. Authorities in ASEAN-5 should continue to review the protocols for information sharing and policy coordination among various financial regulators.

*Source: _wp15211 - 1. Macroeconomic risks*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp15211.pdf_