(Bloomberg) -- Singapore’s central bank warned of “potential dysfunction” in global funding markets and liquidity strains on financial firms that could spill over to banks and companies, amid intensifying risks to international financial stability.  

Central banks should step up as market makers of last resort should liquidity stresses emerge that could threaten severe disruptions in core funding markets, the Monetary Authority of Singapore said in an annual review published Friday, referring to the issue as “the most immediate risk” to global financial stability. 

“Targeted and temporary interventions aimed at smoothing volatility would help avoid a breakdown in market functioning, without obstructing the necessary tightening of monetary policy to deal with the inflationary pressures in the economy,” the MAS said. 

The MAS is the latest to flag the mounting financial stability risks as central banks around the world combat inflation with aggressive policy tightening. Earlier this month, European Central Bank Vice President Luis de Guindos warned the threat to financial stability had grown larger and that the increase in interest rates was weighing more heavily on fiscal positions.

The cases of Britain, where the central bank was forced into action to prevent a gilt market crash, and South Korea underscore the current fragile state of markets. With short-term debt yields at their highest since the global financial crisis, officials in Korea have rushed to stem a credit crunch following the default of a property developer, pledging an aid package of at least 50 trillion won ($38 billion).

Higher Risks

“Tighter financial conditions and highly volatile markets could give rise to liquidity imbalances that central banks and fiscal authorities need to adequately address to avoid precipitating a disorderly liquidation of assets,” it said.

The global economy is beset by rising interest rates, higher inflation and slowing growth along with heightened geopolitical tensions and supply chain disruptions that have clouded the outlook for financial stability, the MAS said.

In Singapore, corporate, banking and household sectors are resilient, the MAS’ stress tests show. Still these sectors should prepare for more challenging macro-financial conditions and local indicators of financial vulnerabilities have edged up, it said. The city-state’s growth is likely to “stay restrained” in the coming quarters and the economy is projected to slow further to a below-trend pace next year, the central bank said.

Other Highlights From the Report 

  • Singapore banks should actively monitor and manage their credit risks because of potential pressure on asset quality coming from a global economic downturn and rising interest rates
  • In the local residential property sector, MAS warns higher interest rates and macroeconomic uncertainties could affect demand in the period ahead
  • For local companies, the liquidity ratios of hotels and restaurants, construction and property sectors have yet to fully recover, while most industries are currently at or exceeding pre-pandemic levels
  • MAS also warned of vulnerabilities from crypto-assets and decentralized finance posing “material risk” to global financial stability through linkages with the traditional financial system
  • Stablecoins’ proliferation as an alternative medium of exchange exposes the international financial system to such issuers


--With assistance from Nurin Sofia, Suvashree Ghosh and Catherine Bosley.

©2022 Bloomberg L.P.