Prices of assets including equities and property have become so ‘frothy’ in a global financial system awash with money that many analysts are bracing

Prices of assets including equities and property have become so ‘frothy’ in a global financial system awash with money that many analysts are bracing themselves for a ‘big shock’.

The warning came in a recent survey by the Monetary Authority of Singapore (MAS), which found that many risk managers and traders are getting twitchy despite the global stock market and property boom.

Trade and Industry Minister Lim Hng Kiang told 400 bankers at the Association of Banks in Singapore’s (ABS’) annual dinner last night that some market players even ’speculated this shock could happen before the end of 2008′.

Mr Lim, who is also MAS deputy chairman, said the survey sounded an alarm of ‘a heightened level of risk in the macroeconomic and financial environment’. ‘Most respondents believed that asset prices were frothy and that a big shock could happen.’

Survey respondents - many of whom are based in Singapore - also pointed to ’shock events’ such as a terrorist attack or geopolitical instability that could disrupt markets.

They raised the danger of ’speculative liquidity’, or floods of cash in search of investments, that has led to historically unprecedented asset prices. They pointed to new players such as hedge funds and private equity outfits, who hold sway in financial markets. Respondents spoke of these players as being ‘highly leveraged’ and holding ‘large speculative positions’.

They also ‘expressed concern about the systemic risks’ posed by these funds, Mr Lim said.

Even as Singapore’s financial sector looks set to enjoy yet another sterling year, banks must not be ‘lulled into a false sense of security by the external environment’s bullishness and resilience to shocks’, he warned.

He cautioned banks not to let their guard down or get ‘overconfident with (their) knowledge and analyses’ of the risks out there. ‘As bankers, you will be familiar with the saying that bad loans are made in good times. This serves as a reminder that vigilance is our constant responsibility.’.

Mr Wee Ee Cheong, chief executive (CEO) of United Overseas Bank (UOB), echoed Mr Lim’s comments in his address as outgoing ABS chairman. Mr Wee, who was sick, had his speech delivered on his behalf by UOB senior executive vice-president Terence Ong.

‘While many factors are beyond our control, we must continue to be vigilant (and) to invest,’ he said.

Bankers at the dinner held at the Meritus Mandarin hotel told The Straits Times that they concurred with the MAS survey findings but said they did not foresee a meltdown.

ABN Amro Singapore CEO David Wong noted that Asia had ‘learnt its lessons well’ from the 1997 financial crisis and is now ’significantly stronger’ and more resilient to shocks.

Ms Chng Sok Hui, DBS Bank’s head of group risk management, said the bank has robust processes to monitor global imbalances, which may last many more years. ‘It is difficult to predict when and whether they will correct,’ she added.

Mr Mateos Atamyan of Bank Julius Baer (Singapore) commented that Singapore’s financial sector ‘can absorb many more shocks and excesses’ compared with 10 years ago, but a ‘risk and challenge’ to its growth is a shortage of human resources, especially well-trained financial advisers.

Mr Lim also highlighted another concern closer to home for banks - ‘reputation risk’. He pointed to the recent public outcry over transparency and fairness of bank practices such as multiple home loan board rates and promotional fixed deposit rates.

While these issues have limited impact on a bank’s short-term profits, they ‘can affect the longer-term reputation and consumer confidence’.

Mr Lim urged banks to be proactive and address customer concerns early. It was a message picked up by incoming ABS chairman David Conner, the CEO of OCBC Bank. ‘Consumers, both companies and individuals, are increasingly vocal in clamouring for higher service standards and more value,’ said Mr Conner, who unveiled plans to educate consumers.

These will include debt management seminars for individuals with an annual income of $20,000 to $30,000, to whom the banks will offer unsecured credit in the coming months.

Sounding alert

Survey respondents raised the danger of ’speculative liquidity’, or floods of cash in search of investments, that has led to historically unprecedented asset prices.

They also pointed to new players such as hedge funds and private equity outfits, who hold sway in financial markets.

Respondents spoke of these players as being ‘highly leveraged’ and holding ‘large speculative positions’.

They also ‘expressed concern about the systemic risks’ posed by these funds.

Source: The Straits Times, 30 June 2007