Although estimates of the effect of our securities holdings on longer-term interest rates are subject to uncertainty, a recent study reported that the Federal Reserve’s securities holdings were reducing the term premium on the 10-year Treasury yield by roughly 1 percentage point at the end of 2016.14 The guidance that the FOMC would eventually start a gradual and predictable reduction of the Federal Reserve’s securities holdings implied that the downward pressure on longer-term yields would likely diminish over time as financial market participants came to expect that the start of balance sheet normalization was nearing.
Our financial market is deepening but domestic credit to GDP is still the second lowest among Asia Pacific countries at 63.6%… Loan quality of the banking system is satisfactory as NPL ratios continue to decline at 1.9 percent… Banks have taken enough buffers for expected and unexpected losses arising from their expanding lending activities. Further, banks maintain ample liquidity and strong core earnings.