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Fed's rate hike cycle to benefit banking sector: FSC

2018/06/16 13:45:14

Image taken from Pixabay

Taipei, June 16 (CNA) An interest rate cycle of the U.S. Federal Reserve is expected to benefit Taiwan's banking sector, which has plenty of U.S. dollar denominated assets, according to the Financial Supervisory Commission (FSC).

The FSC, the top financial regulator in Taiwan, said Taiwanese banks own more than NT$1 trillion (US$33.33 billion) worth of greenback denominated assets, so as interest rates in the U.S. move higher, these banks are expected to rake in more interest income.

During a policymaking meeting held on Tuesday to Wednesday, the Fed decided to raise its benchmark interest rate by 0.25 percent to a range between 1.75 percent and 2.0 percent, the highest since September 2008, as the U.S. economy remained on the path to a strong recovery.

All of the eight voting members of the Fed's Federal Open Market Committee (FOMC) voted in favor of the rate hike decision, indicating the U.S. central bank has turned more hawkish in its monetary policy.

The Fed also hinted it will raise its key interest rates two more times during the rest of this year, beating the market's previous prediction that it would only raise rates once. That means the U.S. central bank could hike rates in September and December.

Due to rising inflationary pressure, the Fed could raise interest rates for an additional four times in 2019, the U.S. central bank said.

Rate hike fears sent ripples through the global equity markets, but Taiwan's FSC is closely monitoring the possible benefits the local banking sector could reap under such circumstances.

In addition to the large U.S. dollar denominated assets Taiwanese banks hold, the FSC said, many banks here are keen to participate in international syndicated loan initiatives, so rising interest rates in the U.S. market is expected to boost the lenders' income further.

As for Taiwan's life insurance sector, which has invested heavily in the U.S. treasury, rising interest rates will likely affect bond prices, but such an impact could be limited as life insurers amortize the losses resulting from the fall in bond prices in the longer term, the FSC said.

It added that it will urge the local life insurance sector to come up with measures to control risks and assuage the possible adversary impact resulting from volatility in bond yields in the U.S. market at a time of a rate hike cycle carried out by the Fed.

The FSC said the Fed's rate hike is expected to have a limited impact on the local securities sector as U.S. dollar-denominated bonds accounted for 11.78 percent of the sector's total net worth, while greenback denominated futures products made up less than 1 percent of the sector's total assets.

(By Tsai Yi-chu and Frances Huang)
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