Households can withstand shocks

The Star, Thursday March 27, 2008: BANKS, insurance companies and households are well positioned to withstand severe shocks from any fallout caused by a big plunge in the stock and bond markets, said Bank Negara.

The central bank, which has conducted a series of stress tests based on several scenarios, the worst being a stock market fallout experienced during the Asian financial crisis, said the outcome of the stress tests indicated financial institutions and households had the capacity and ability to make adjustments and adapt, given the wealth that had been built up over the past several years.


An investor watches a stock board in Kuala Lumpur. Bank Negara says households are well positioned to withstand severe shocks from any fallout caused by a big plunge in the stock and bond markets – AP

“Stress testing the scenarios on the position of households revealed that households could withstand shocks from a significant decline in the net asset value of their unit trust investments which accounted for 16% of total household financial assets without significantly affecting the debt-servicing capability,'' said Bank Negara.

The central bank said the strong reserves position of banks would enable financial institutions to absorb potential losses with only a minimal impact on capitalisation. It said the impact of profits from the maximum potential loss would be larger.

As for the insurance and takaful sectors, more severe shock scenarios were prescribed due to the sector's higher exposure to stocks as a percentage of total assets.

Bank Negara said tests showed that the big players in the sector would remain intact but the small number of institutions might require some injection of capital under the most extreme of scenarios.

It said Malaysia was relatively insulated against the subprime fallout from the US but a direct effect was felt in the bond market where yields of government securities rose as foreign funds pulled money out from Malaysia.

On its assessment of the financial sector, Bank Negara said the stability of the system was intact.

“On aggregate, the financial system demonstrated stronger financial resilience.

“The accumulation of financial buffers has also led to an increased capacity of the financials sector to withstand higher risk levels from greater market volatility and financial shocks,'' it said.


Source from: The Star, URL:
http://biz.thestar.com.my/news/story.asp?file=/2008/3/27/business/20759229&sec=business