APAC banking markets to tighten macroprudential policies in 2023: Fitch

Malaysia and Thailand will take steps to strengthen their mortgage sectors, said Fitch.

APAC banking markets are expected to tighten macroprudential policies in 2023, especially in markets besieged by high household and corporate leverage, according to Fitch Ratings.

“We see further macroprudential tightening as likely in many emerging-market APAC banking systems, reflecting the scaling back of previous support programmes,” the ratings agency said in a media note.

Fitch identified India, Malaysia, and Thailand as the likeliest to tighten policies next year.

India is already set to roll back reduced risk weights for fresh home loans after March 2023, whilst Malaysia and Thailand are expected to undertake steps to strengthen their mortgage sectors.

“We expect Malaysia to gradually unwind a programme in place to encourage home purchases, and we think it is probable Thailand will raise loan-to-value restrictions on mortgages that were lowered during the pandemic,” Fitch said.

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The non-financial sector debt notedly remains at an all-time high, which in turn creates a high bar for authorities that seek to loosen macroprudential policies to support economic growth, Fitch said.

Currently, all major developed market banking systems in the region operate macroprudential policies. Australia is set to introduce a countercyclical capital buffer of 1% beginning January 2023, whilst New Zealand’s buffer for domestically significant important banks is reportedly set to increase to 2 percentage points (pp) beginning July 2023.

“However, the impact of these measures should be limited as banks already meet them and authorities will be cautious in introducing other measures such as debt-to-income caps so long as housing markets remain under pressure from higher rates. We also believe further tightening of macroprudential policies is probable in Japan and Singapore,” Fitch said.

In contrast to the rest of the region, South Korea may actually be the only developing market where macroprudential policies could see loosening. However, this has more to do with how restrictive the nature of some existing measures in the country, particularly on mortgages above a certain value in Seoul.

No further macroprudential tightening is expected in China next year. However, neither does Fitch expect measures already in place to ease. 

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“We do not expect a material easing of measures that have already been implemented, despite the country’s housing sector stress. We still believe the regulatory framework and related macroprudential policies will tighten over the medium term,” the ratings agency said.

Overall, should APAC bank authorities choose to recalibrate their responses to deteriorating conditions, they will most likely revoke capital buffer measures, such as broad-based CCyBs, to incentivise banks to continue to lend, Fitchsaid

“More targeted macroprudential actions such as borrower-based measures and risk-weighted asset floors are likely to be maintained by supervisors to target specific risks, such as those posed by high levels of household mortgage debt, even in a more difficult economic environment. These measures not only shield banks from asset quality deterioration, but also strengthen borrowers’ capacity to absorb shocks,” Fitch concluded.