•  Banks in the region could face higher non-performing loans. They could also face reduced US Dollar funding if there are large capital outflows from ASEAN. •  But their liquidity and capital positions are generally sound and they should be able to weather this. ASEAN growth story still good Over the medium to long term, ASEAN is expected to remain among the fastest growing regions in the world. Last year, the combined GDP of ASEAN was close to $ trillion – larger than India. •  The ASEAN-4 – Indonesia, Malaysia, Thailand and the Philippines – are projected to grow by at least 4% per annum on average over the next five years. •  It could be as high as 6% if ASEAN becomes more integrated and these countries successfully implement structural reforms to raise productivity and competitiveness. For banks in ASEAN, it is not just the size and growth of the economies that matter. It is the composition of that growth and demand. Rising incomes and the agglomeration effects of urbanisation will significantly expand the ranks of the middle class in ASEAN. •  In 2010, ASEAN had a population of 600 million, with around a quarter making up the middle class. BIS central bankers’ speeches  1  •  In 2030, ASEAN will have a population of 700 million, with about two-thirds attaining middle class status. •  In other words, the size of the middle class will swell by as much as three times over two decades.
Affordability risks of new mortgages financing residential investment property are high and have risen further. These developments have taken place against a background of persistent imbalances in the mortgage and real estate markets. Both mortgage-lending volume and prices for single-family houses and apartments continued to rise at a moderate rate in 2019. Although prices of residential investment property have stagnated of late, there is still a risk of a price correction in this segment in particular. On the one hand, this is due to the sharp price increases in previous years. On the other, larger numbers of vacant dwellings suggest that brisk construction activity in rental apartments may have led to an oversupply. Despite banks’ high risk appetite and the persistent imbalances in the markets, SNB stress tests suggest that the resilience of the domestically focused banks remains adequate overall. Thanks to robust capitalisation, most of these banks would be able to absorb the losses incurred in adverse scenarios. Given the risks I just mentioned, this is positive. It is crucial for the stability of the financial system that banks continue to hold sufficient capital to be able to cover the risks on their books. Ongoing pressure on margins means that the incentive for domestically focused banks to take on risks remains high. This applies to mortgage lending in particular. The revised selfregulation rules for banks in the residential investment property segment, which come into force at the beginning of 2020, should help to prevent a further build-up of risks in this segment.