Singapore banks are well capitalised and household debt is low relative to assets but the current low interest rate environment could lead to excessive borrowing by individuals and firms, the city-state’s central bank warned on Thursday.

The Monetary Authority of Singapore (MAS) in its annual Financial Stability Review also said Singapore banks are well capitalised and should have little difficulty meeting the new Basel III requirements.

 

“Local banks’ balance sheets and capital positions remain strong. Their combined Tier 1 Capital Adequacy Ratio (CAR), which has been steadily rising over the past 11 quarters, averaged 14.2% in Q3, 2010,” MAS said in its report.

 

“Owing to their high starting capital base and healthy loan-to-deposit ratios, the higher capital requirements that will be required are not likely to have a significant impact on local banks’ supply of credit to the economy,” the central bank said.

 

Singapore’s three local banks DBS Group (DBSM.SI), Oversea-Chinese Banking Corp (OCBC.SI) and United Overseas Bank (UOBH.SI) are the dominant players in the local mortgage and SME markets but compete with global players such as Citigroup (C.N) and HSBC (HSBC.L) in financing the needs of bigger companies.

 

Under the new Basel III rules, banks around the world will have to raise their Tier 1 capital to 6% from 4% between Jan 1, 2013 and Jan 1, 2015.

 

The new rules also demand a higher minimum common equity ratio along with a buffer requirement which means banks must meet a 7% core Tier 1 capital requirement by Jan 1, 2019.