Asia-Pacific banks are bracing for a new normal of economic turbulence, and they’re finding that old risk models just aren’t cutting it. A surprising sell-off in U.S. Treasuries following the imposition of sweeping tariffs by the U.S. in April 2025 caught many institutions off guard, revealing critical gaps in their preparedness for interconnected global shocks.
Tariffs Trigger a Reassessment of Risk
The unexpected reaction to U.S. trade tariffs exposed vulnerabilities in risk management across the Asia-Pacific region.
- Macroeconomic shocks are increasing in frequency and severity.
- Traditional linear risk models proved inadequate during the tariff shock.
- Banks are turning to stochastic modeling and more frequent stress tests.
- Liquidity management and the dollar’s dominance are key concerns.
The imposition of far-reaching trade tariffs by the U.S. in April 2025, while anticipated, proved to be a more potent shock than many financial institutions had predicted. Risk managers were particularly surprised by the simultaneous pressure on both stock and bond markets.
Sam Ahmed, Deriv Asia X
Sam Ahmed, managing director of Deriv Asia X and formerly group chief operating officer for financial markets at DBS, argues that many Asia-Pacific banks relied on linear modeling that was ill-equipped to handle such a “black swan” event. He identified three key risk layers: the potential for a Donald Trump victory in the 2024 U.S. election, the resulting tariff-induced market volatility, and the counterintuitive sell-off of U.S. Treasuries.
“Most institutions captured the first- and second-order risks regarding Trump’s election,” Ahmed explained. “However, they missed the third: the assumption that the global impact of tariffs would trigger an equity selloff and a flight to U.S. Treasuries. Instead, five- and 10-year Treasuries sold off as yields rose sharply, and we saw selective flows into emerging market assets – a rare occurrence during a market crisis.”
Stress-Testing: Beyond Historical Data
The tariff shock highlighted a critical flaw in many banks’ stress-testing approaches: an over-reliance on historical data.
“We live in a world characterized by black swans and fat tails, where you can’t forecast future market movements based on historical value-at-risk and correlations,” Ahmed stated. “Banks need to change their linear models and introduce both randomness in event outcomes and multiple stochastic scenarios.”
Monte Carlo stochastic modeling is gaining traction as a potential solution. While already used in critical finance functions at many large banks, the tariff shock has prompted a reevaluation of the risks being captured. However, stress-testing has its limits.
“You can perform lots of stress-testing. You can double-stress the book. You can market-stress the book. But you don’t know exactly what the next event is going to look like,” said the head of liquidity management at an Asia-Pacific bank. “Everybody knew about the tariffs, but nobody knew about the numbers.”
David Allright, Bloomberg
“Collectively, these shocks underline the need for dynamic, real-time risk reporting that can apply a variety of data-driven stress tests to model-changing conditions and external events,” noted David Allright, global head of sell-side risk product at Bloomberg. Banks are also increasing the frequency of stress tests under regulatory pressure, a development welcomed by the head of liquidity management.
Liquidity Concerns and the Shadow of SVB
The rise in macroeconomic shocks has intensified scrutiny of banks’ ability to quickly convert assets into cash during a crisis. This concern stems from the run on Silicon Valley Bank (SVB) in the U.S. in March 2023, the third-largest banking failure in U.S. history, and its subsequent impact on Credit Suisse.
Roland Ho, OCBC
“Sometimes a bank failure is not about solvency. It’s about logistics,” said Roland Ho, global head of asset-liability management at OCBC. “Banks need to be confident that they can easily convert what they consider HQLA [high quality liquid assets] into cash to meet their obligations, even on an intraday basis.”
Regulators in Asia-Pacific are responding with stricter liquidity risk management guidelines. The Monetary Authority of Singapore, for example, published new guidelines at the end of August outlining more detailed expectations. “As the market adapts to heightened liquidity requirements, modelling real-time behavioural risk scenarios will be fundamental to strengthening overall risk management,” Allright of Bloomberg added.
To bolster its liquidity management, OCBC has implemented a new short-term U.S. dollar funding mechanism with JP Morgan using blockchain technology. “Even before the U.S. markets open, we are able to tap into dollar funding should the need arise,” Ho explained. “This is important for our risk management – and for addressing any concerns that the regulators might have.”
Interest Rate Volatility and Accounting Shifts
Sudden shifts in interest rates are also prompting banks to reassess their exposure and shorten the duration of their assets.
“If rates move up too sharply, then our asset valuation will take a hit,” Ho said. “To address this, we have calibrated the duration of our interest rate risk, while managing an increased notional amount that we have to take on.”
Rising rates present a double-edged sword, potentially pressuring asset valuations while boosting net interest income. “We look at the impact of interest rate changes across the different risk measurements. We manage everything holistically rather than look at things in isolation. This improves our overall risk profile,” Ho added.
Interest rate shocks may also encourage the use of hold-to-collect accounting for fixed income assets. “For some of the bonds we purchase, we apply Fair Value Through Other Comprehensive Income accounting. This still causes certain fair-value reserve changes that impacts the bank’s capital, namely Common Equity Tier 1. Applying hold-to-collect accounting will remove some of this volatility,” Ho explained. However, this approach is only suitable for assets held on the balance sheet with the intention of generating regular cash flows.
Another concern is the potential for higher rates to drive depositors to seek better returns elsewhere, creating a funding squeeze, particularly for regional banks in Japan. “Smaller regional banks are now facing an outflow of deposits to other banks with higher credit, or those that offer higher savings returns. This is a significant challenge for many institutions, who may need to find new investment opportunities,” said Tsuyoshi Oyama, chief executive officer of RAF Laboratory, a risk management consultancy based in Tokyo. However, pursuing higher yields can introduce additional risk.
A Structural Shift in Global Finance?
Beyond short-term volatility, banks are questioning whether recent macroeconomic shifts signal a broader structural change in the global financial landscape.
“We’re witnessing an important development where global financial markets are increasingly shaped by a fragmented geopolitical landscape. One secondary effect is a gradual decline in the use of the U.S. dollar, not only as a reserve asset but also as a payment currency,” Ahmed observed.
While some countries are promoting their own currencies, the dollar retains a key advantage: its widespread use among investors outside the U.S. “I have not yet seen a situation in which CNH was traded, where China wasn’t either the buyer or the seller,” said the head of liquidity management. “Cyclically, the dollar may be declining, but structurally I’m not so convinced. One has to ask: what is the economically viable alternative to the dollar? Right now, there isn’t one.”
Ashok Das, Deutsche Bank
Ashok Das, Deutsche Bank’s head of global emerging markets and fixed income and currencies trading for Asia, acknowledged the dollar’s depth and resilience. “People are not going to give up the dollar just because the geopolitical risk on the currency is more than it was in the past.”
However, he conceded that a shift is underway, requiring risk managers to adapt. “Those that are exposed to U.S. dollars definitely want to diversify or hedge that exposure a bit more. At the same time, corporates in certain countries want their invoices to be in their home country [currency]. It’s not a de-dollarisation, but we are going to see a lot more fragmentation in the markets,” Das said.
The recent months have provided valuable lessons for Asia’s banks in navigating uncertainty. Each shock – from tariffs to rate spikes – has exposed weaknesses in existing models and spurred a rethinking of risk measurement and management. Ultimately, understanding risk, rather than trying to eliminate it, may be the most valuable asset in the fast-moving and complex landscape of Asia.
