5 minute read 31 May 2023
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How Asia-Pacific institutions can make the most of the crisis

By Andrew Gilder

EY Asia-Pacific Banking and Capital Markets Leader; Global Corporate, Commercial and SME (CCSB) Banking Consulting Leader

Banking and Capital Markets Leader. Over 25 years of advisory experience on risk controls and accounting. Keen interest in consumer banking and other banking trends across Asia-Pacific.

Swee Yen Yeoh
5 minute read 31 May 2023

Review balance sheet, liquidity and capital management, re-evaluate stress tests and rebalance portfolios.

In brief:

  • The region’s financial sector is significantly better positioned to withstand stress than it was during the 2008 global financial crisis.
  • Assuming the contagion is contained, only a handful of local institutions will be directly affected by the recent bank failures in other geographies.
  • However, all financial institutions should leverage the learnings from this series of events to improve their organizational resilience and get ready for the expected regulatory tightening.

To a large extent, the US and Swiss banking failures in the first months of 2023 are unlikely to have any significant immediate consequences for Asia-Pacific financial institutions.

Concerns of contagion flourished in the early days following the failures of two mid-size U.S. lenders and massive outflows of uninsured deposits. Investors also became worried about similar runs on other American banks given their liquidity, interest rate risk and levels of uninsured deposits. However, US regulators acted quickly to stabilize markets, including backing the uninsured deposits of failed banks. A group of 11 US banks also stepped up to provide USD$30b¹ in liquidity.

Then, the failure of First Republic Bank, which has been taken over by JPMorgan Chase, in late April marked the second-largest bank failure in US history. Given these actions and the strength of the local financial system, Asia-Pacific institutions are not in immediate danger. Since the global financial crisis, the sector has invested in enhanced risk management, expanded capital and liquidity buffers and adopted stress testing and contingency planning. Also, loan- to- deposit ratios across the region are close to 90%², making them less at risk of devaluation losses. Some financial services leaders can even see opportunities to competitively reposition their institution in response to the current crisis.


of webcast participants believe the current challenging financial environment contains more opportunities than risks for Asia-Pacific institutions.

The above factors suggest that contagion will be relatively well contained. However, the world’s institutions still face a volatile period in the financial markets, with a focus on both emerging risks in the financial system and within individual institutions. Prior tightening cycles have flushed out hidden weaknesses in the financial system and the full consequences of the fiscal and monetary policy responses remain unknown.

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How will regional and global regulators respond?

The perceived drivers of the recent failures and market stress are reshaping supervisory and regulatory priorities. In the near term, the regulatory focus is likely to be on liquidity risk management, unrealized losses and business model vulnerabilities, particularly where there are sector concentrations.

Given the recent banking failures were due to firm-specific vulnerabilities, tailoring existing rules is more likely than an acute global response. In the US, rules for mid-sized banks may be revised, especially in relation to aspects of liquidity coverage ratio, the role of non-convertible capital instruments, the exclusion of certain asset classes from leverage requirements, risk capture and supervisory stress testing.

We believe that the global supervisory response will be limited to enhancements made to the current rules in order to ensure full compliance, especially where there are gaps to be remediated by some institutions.

Looking ahead, the focus will be on a broader set of drivers and capabilities, including:

  • Balance sheet and capital management
  • Recovery and resolution planning
  • Crisis management and remediation

Considerations for banks

Banks need to understand and manage any new risks to capital and liquidity, and revisit their risk tolerance and portfolio strategies accordingly. Firms should also seek opportunities to bolster governance and oversight, strategic communications and crisis management to prepare for and respond to rapidly emerging market events. Priority focus areas include:

  • Assess key risk indicators – With information moving at social media speed, even well positioned banks must closely monitor and stay ahead of key risk indicators, which fall into two groups.

1. US-specific indicators

These signals point to potential concentration issues in the underlying business portfolio, issues in asset and liability management, liquidity management or unrealized losses impacting the balance sheet. Even with the backstop measures put in place, the presence of the following issues may generate a perception of weakness in the market:

• High unrealized losses in the security book
• High percentage of deposit accounts uninsured
• High asset-liability-duration mismatch
• High loan to deposit ratio
• Portfolio concentrations
• High commercial-to-consumer counterparty ratio

2. Broader market indicators

For specific sectors or individual institutions, early warning indicators of market movements include:

•Increasing deposit outflows
•Liquidity volatility
•CD spread widening

Larger and more diversified institutions, which are in a relative position of strength, will be able to take advantage of opportunistic acquisitions to drive growth and competitive positioning. But management teams must balance risk management with the desire to capitalize on growth opportunities.

  • Enhance balance sheet and liquidity management – Banks are currently relying on existing capabilities to actively manage through current market volatility. Looking ahead, we expect enhancements across a range of balance sheet and liquidity risk management capabilities:

• Governance and oversight
• Asset and liability profile
• Reporting and monitoring tools
• Early warning indicators
• Crisis management and contingency funding
• Risk identification and limits
• Internal liquidity stress testing

Larger banks already perform daily T+1 reporting on liquidity, but smaller banks may have opportunities to enhance accuracy, granularity, frequency and latency to enable timely reporting on liquidity issues.

Most banks will need to look more deeply at the treatment of insured or uninsured deposits and in particular customer sectors. Exposure to early technology start-ups or crypto companies will also need to be reviewed.

  • Adapt capital management to volatility – The current situation is more of a balance sheet and liquidity crisis, than a capital crisis, at least in the short term. However, banks should ask themselves how the features of the recent crisis will apply more broadly to the capital planning process.

• How can we better integrate stress testing across balance sheet, capital and liquidity risks?
• How can we capture risk across multiple scenarios by applying idiosyncratic factors?
• How might contagion and correlated risks across asset classes and counterparties translate into capital risk?
• Do our model calibration assumptions reflect the current market stress?
• Do we need to adjust capital stack and stress buffers in the context of uncertainty?
• What less likely scenarios should we include in capital contingency playbooks?
• How should we adjust our investment portfolio’s capital allocation?

  • Evaluate business portfolio composition – Banks need to recalibrate the vision, goals and competitive positioning of business portfolios and decide whether their business strategy is still fit for purpose. The key here is understanding the changing requirements of existing clients, consumers and investors, as well as the demands of any new clients prioritized in revised business strategies. To create a healthy portfolio mix, banks must be prepared to streamline their portfolios, enter new segments and exit others.

Considerations for asset managers

Only a handful of funds under management in the region will be writing down assets and incurring losses following the recent events, but asset managers have opportunities to look at rebalancing allocations for resilience, revisit stress testing and find new value in the current climate.

Many asset managers are already reassessing their exposure to at-risk banks and reallocating to less risky bonds or even away from the asset class altogether. On the wealth management side, high- net- worth individuals are also thinking about their allocation to banking, looking for safer asset classes.

Next steps include:

  • Revisiting risk management strategies and ensuring firms are sufficiently robust to withstand stress events. Asset managers should stress test their portfolios to identify key risk areas to improve resilience and help wealth managers to present a balanced offering.
  • Assessing liquidity positions, ensuring sufficient cash on hand to meet potential redemptions or margin calls, diversifying counter-party risk and making provisions to match capital flows with gates or side pockets.
  • Leveraging technology to support process digitalization, distributions and middle- and back-office transformation.

Imperative to improve market communication

When communicating with investors and regulators about risks and responses, transparency is key to staying ahead of social media. Institutions should clearly explain how they are managing potential risks and keep regulators and investors regularly informed about any reactions to market events.


Asia Pacific’s financial institutions are facing turbulent markets and economic uncertainty. Firms should move quickly to avoid liquidity stress, review balance sheet and capital management, and strengthen crisis management and remediation processes. Opportunities are also available to drive growth and differentiation in a nervous market.

About this article

By Andrew Gilder

EY Asia-Pacific Banking and Capital Markets Leader; Global Corporate, Commercial and SME (CCSB) Banking Consulting Leader

Banking and Capital Markets Leader. Over 25 years of advisory experience on risk controls and accounting. Keen interest in consumer banking and other banking trends across Asia-Pacific.

Swee Yen Yeoh