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FEDERAL RESERVE'S MONETARY POLICY AND MONGOLIA
Federal Reserve's Monetary Policy and Mongolia

FEDERAL RESERVE'S MONETARY POLICY AND MONGOLIA


The US monetary tightening over the next few years should be manageable for most Asia-Pacific banks, says Fitch Ratings. However, markets with higher dependence on foreign funding and external debt levels will be more vulnerable due to potentially higher market, credit and liquidity risks. Most banking systems have some vulnerability to market risk, although these appear to be limited. Among developed markets, Hong Kong and Singapore have high foreign-currency exposure linked to their roles as financial centres and may also be vulnerable to shifts in investor sentiment that cause market volatility. In emerging market banking sectors, Mongolia and Sri Lanka are vulnerable, with higher levels of foreign-currency liabilities and potential spill-over from macroeconomic weakness.

Fitch's base case is for the Fed fund rate to be raised to 3.25% by end-2019, although there could be abrupt changes in market expectations along the way.

It is notable that Asia-Pacific banking sectors showed little vulnerability during the last Fed rate hiking cycle from 2004-2006, when the target rate rose to 5.25% from 1.00%. This period mostly correlated with a benign environment, including stable or improved asset quality, profitability and capital adequacy. Since then, most Asia-Pacific banking systems have increased leverage, in some cases, substantially. That said, the regulatory environment has also become more rigorous, with the adoption of Basel III, increased usage of macro-prudential policy measures and the introduction of "endgame" regulations, such as resolution regimes.

Source: FitchRatings.com 


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