ADB Warns Sub-Prime Fallout Could Get Worse

Source : The Business Times, November 23, 2007

FALLOUT in Asia from the US sub-prime mortgage crisis, through financial and other channels, may prove heavier than expected, the Asian Development Bank warned in a report published yesterday.

This came as a Bank of Japan Policy Board member cautioned that the impact of the crisis is likely to be long-lasting, and is also on the heels of US Treasury Secretary Henry Paulson's warning that US financial defaults could accelerate next year.

Strong economic growth and improved financial systems, plus limited exposure to US sub-prime mortgages, have helped limit the regional impact from global credit problems, the ADB said. But 'though there are no signs of widespread problems in emerging East Asia, downside risks to regional economic and financial market trends remain and wider ramifications cannot be ruled out', it suggested.

Prolonged global financial market volatility, a rise in risk aversion and re-pricing of credit risk could lead to a reversal of capital flows into Asia, Jong-Wha Lee, head of the ADB's Office of Regional Economic Integration, said in the Bank's latest Asian Bond Monitor publication.

The ADB called for improved transparency in credit markets through better valuation and accounting of off-balance sheet instruments, strengthening of risk management and enhancing the enabling environment for local currency bond markets. It also urged stronger regional cooperation in monitoring and regulating financial markets and in developing financial institutions' risk management techniques.

The ADB's comments echoed the increasing concern being voiced in various quarters about the spreading impact of the sub-prime crisis. Bank of Japan Policy Board member Seiji Nakamura said yesterday that problems were taking longer to settle than expected and that their impact could broaden from here on.

Mr Paulson also cautioned this week that potential US financial defaults would be markedly bigger in 2008 than this year as less creditworthy mortgages are exposed.

The OECD (Organisation for Economic Cooperation) has calculated that some US$890 billion of poor credit quality mortgages will need to have their interest rates reset next year. Cumulative losses in the US$200 billion to US$300 billion range from the mortgage market crisis 'seem feasible', as a result, it has suggested.

Following a series of write-offs by leading US banks, Japan's Mitsubishi UFJ Financial Group on Wednesday reported a near 50 per cent drop in first-half profits owing to losses of 24 billion yen (S$320.4 million) on sub-prime related investments and on its credit card unit.

Other Japanese banks have also declared significant sub-prime related losses this week. Mizuho Financial Group, another of Japan's three megabanks, booked the largest loss related to recent financial market turmoil. It took 70 billion yen of losses in the first half of the current financial year while the third megabank, Sumitomo Mitsui Financial Group, took losses of 32 billion yen in the first half while indicating that these could rise to 87 billion yen for the full year.