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Local banks are able to withstand a 30-percent home price drop: FSC

TAIPEI, Taiwan -- With relatively low loan-to-value ratios, local banks will be able to sustain a 30-percent drop in housing price, the Financial Supervisory Commission (FSC) said yesterday.

The FSC held a press conference yesterday to announce the result of a recent stress test conducted by local banks. Two scenarios were tested.

In the first scenario, housing price dropped by 20 percent and triggered a 1 percentage point increase in interest rates. This would contribute to a loss of NT$37.4 billion for local banks.

In a more severe scenario, housing prices dropped by 30 percent to trigger a 2-percentage-point increase in interest rates. This would result in a loss of NT$73.8 billion.

In the first scenario, the capital adequacy ratio (CAR) would dip from 11.87 percent to 11.71 percent. In the second scenario, the CAR went down to 11.56 percent. In both cases, the ratio was higher than the 8-percent requirement.

The loan-to-value ratio is mostly below 70 percent for most mortgages. As such, banks will be able to withstand a 30-percent drop in housing prices, the FSC said. Nevertheless, the FSC has instructed local banks to increase their capital holding to better cope with potential risks.

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