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The New Basel Capital Accord
On 16 January 2001, the Basel Committee on Banking Supervision issued its second consultative paper proposing a New Basel Capital Accord to replace the existing Accord that was first introduced in 1988.
The New Accord consists of three mutually-reinforcing pillars: minimum capital requirements, supervisory review process, and market discipline. Taken together, these three pillars will contribute to a higher level of safety and soundness in the financial system. The New Accord is more risk-sensitive and comprehensive than the 1998 Accord. It is designed to be incentive-compatible and will serve to encourage banks to further refine their risk management capabilities.
MAS welcomes the proposed changes to the Accord and will be adopting the key broad initiatives for the local banking industry. MAS has been working closely with the Singapore banks that wish to adopt the more sophisticated risk management techniques proposed in the New Accord to ensure that they are well positioned to do so.
Capital Adequacy for Singapore Banks
The capital requirement for Singapore-incorporated banks was revised on 19 September 2000 to allow Singapore banks further flexibility in managing their capital. The minimum Tier 1 Capital Adequacy Ratio (CAR) component for banks was lowered from 10% to 8%, while the total CAR requirement was kept at 12%. In line with the move away from a ‘one-size-fits-all’ approach to one that is risk-focused and institution-specific, MAS may also, on a
supervisory basis, require individual banks to maintain higher capital than the regulatory minimum where necessary. The changes also apply to financial holding companies.
To provide greater clarity on the requirements for the issuance of innovative Tier 1 capital instruments, MAS consulted the industry on a set of guidelines, to be issued in the second half of 2001. These guidelines will broadly reflect those promulgated by the Basel Committee for Banking Supervision in October 1998.
Risk-based Capital for Insurance Companies
MAS embarked on a major exercise to review the valuation and solvency framework for insurance business. A
workgroup, comprising representatives from the Singapore Actuarial Society, Institute of Certified Public Accountants of Singapore and MAS officers, was formed in September 2000 to design a risk-based capital model for life insurance business. An exposure draft outlining the proposed framework for valuation and capital adequacy requirements for life insurance business was circulated for industry feedback in February 2001. A similar workgroup was also formed to design an analogous model for general insurance companies. MAS will continue to work closely with insurers to implement an appropriate risk-based capital framework for Singapore while harmonising prudential standards at the international level.
Risk-based Capital for Securities Dealers and Futures Brokers
MAS is finalising its study of a risk-based capital adequacy framework for licensed securities dealers and futures brokers which are members of SGX. The proposed framework will allow member companies to better address the risks they face, in the light of market and product developments. The framework will take into account comments and findings from two rounds of consultation with member companies, and is expected to be introduced in the Securities and Futures Regulations in the second half of 2001.
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