Indeed, with the considerable benefit of hindsight, there can be little doubt that a significant component of credit growth served to create and nourish financial and economic imbalances that have ultimately proved unsustainable, most notably in the housing market. Where mortgages had once been scarce or expensive, they became cheap and readily available. House prices boomed (Chart 6). Institutional and psychological factors fuelled an asset price bubble in real estate. Supported by the dynamism of the real estate market, the peripheral economies grew rapidly. But the growth achieved was not balanced: sectors of the economy associated with the housing boom – construction and financial services – grew disproportionately (Chart 7), drawing resources away from other activities, raising concentrations in loan books and increasing macroeconomic vulnerability to sector-specific shocks. Rapid economic growth led to increased demand for imports, while strong wage growth put pressure on the price competitiveness of the tradable sector. Large deficits on the current account of the balance of payments therefore emerged (Chart 8). Inflows of financial capital from abroad – the proverbial “hot money” – were needed to finance the current account deficit. Such unbalanced growth also had important consequences for the fiscal accounts (Chart 9). The housing boom (and its positive impact on broader economic activity and spending) increased tax revenues, dramatically in some cases. These “windfall” increases in tax revenue were treated as structural rather than cyclical in nature, as the housing boom was prolonged and appeared to survive the cyclical weakness in activity in mid-decade.

Banks entered the crisis from a position of strength and have been a source of stability and support for individuals and businesses throughout the crisis. MAS’ concerns at the onset of the crisis that defaults among weaker corporates could strain banks’ profitability and capital positions have not materialised. The domestic systemically important banks have started the year with strong capital positions. In fact, their aggregate CET1 ratio has held firm, at 14.7% in the first quarter of 2021 compared to 14.4% prior to the onset of COVID-19. Although default rates have seen a slight uptick, the banking system’s non-performing loan ratio has remained largely stable at around 2.4% as at Q1 this year. MAS recognises however that problem loans can take time to surface. Borrowers on full or partial loan moratoriums may not show signs of financial stress, especially if they are also obtaining financial support from the government. As support measures taper off, banks will have greater clarity about the repayment ability of their borrowers. It is good that our banks have set aside provisions against potential bad debts. MAS is conducting additional stress tests to assess whether it is necessary to extend the current dividend restrictions on local banks and finance companies. CYBER RESILIENCE Cyber risk remains one of the top risks which MAS is tracking closely. The incidence, scale, and complexity of cyber-attacks continue to mount. Recent attacks on major organisations globally such as Colonial Pipeline, Microsoft and Accellion, are strong reminders that the fallout from a cyber attack can be far-reaching.