Annual Report 2001/2002

Risk-based Regulation


For Banks

MAS is developing a framework that sets capital adequacy requirements according to the riskiness of the banks’ activities, as part of its ongoing efforts to move towards a more risk-sensitive supervisory framework. MAS will also refine its policies on credit risk transfer instruments and mechanisms, taking into account changes in the industry that have occurred since the release of MAS’ guidelines on asset securitisation and credit derivatives in 2000. MAS will work closely with the industry in preparation for the implementation of the New Basel Accord. MAS will also focus on developing a framework for validation of internal ratings systems of banks that desire to adopt the internal risk-based approaches under the New Accord.

For Insurance Companies
In developing the risk-based capital (RBC) framework for insurance companies, members of industry bodies, the actuarial profession, and the accounting profession were invited to join several work groups, to examine specific issues.

(a) The Risk-based Capital Work Group for Life Insurance Business, formed in November 2000, reviewed the valuation and solvency framework for life insurance in Singapore. Following the issue of its Exposure Draft in February 2001, the Work Group issued a discussion paper on the Valuation of Assets and Liabilities for Traditional Life Policies in August 2001.

Another paper on capital adequacy requirements for life insurers in Singapore was circulated for industry feedback in February 2002. To facilitate discussions within the industry, the Work Group also held industry-wide briefings on its recommendations. The Work Group is embarking on an industry-wide testing of the proposed framework to investigate its potential impact on the market.

(b) Another work group comprising actuaries and MAS representatives was formed in April 2001 to work out the details for the implementation of the certification of policy liabilities for general insurance.

(c) A new work group involving actuarial and accounting professionals was formed in April 2002 to develop the RBC framework for the general insurance business.

For Member Companies of SGX
MAS completed its study of a RBC adequacy framework for licensed securities dealers and futures brokers that are member companies of Singapore Exchange (SGX). The new RBC framework will enhance the capital efficiency of SGX member companies and lower the entry hurdle for legitimate and qualified players to be admitted into Singapore’s capital markets. This enhanced efficiency is achieved without compromising regulatory effectiveness, as the RBC framework is more risk-sensitive and results in more appropriate capital charges for business risks undertaken by SGX members. The new framework will form part of the Securities and Futures Regulations.

The RBC framework is benchmarked to international best practices, and has been tested with actual data from SGX member companies. MAS will continually assess the framework and make refinements, where necessary, to ensure that it is up-to-date and relevant. To facilitate a smooth migration to the RBC framework, existing member companies of SGX will be given a 12-month grace period, beginning from the date of implementation, to transit to the new capital regime.

During the year, MAS announced a new risk-based Liquidity Supervision Frame-work for banks in Singapore. The new Framework is a move away from the existing “one-size-fits-all” 18% statutory minimum liquid assets (MLA) requirement to one that is based on a bank’s own liquidity risk profile and risk management capabilities. The new liquidity requirements will lower banks’ prudential costs without compromising their financial soundness or the stability of the financial system.

Under the new Framework, a bank can choose to remain on the existing statutory MLA requirement or move to a risk-determined MLA requirement specific to the bank. The approach consists of MAS’ periodic assessment of a bank’s liquidity risk management systems and processes, as well as the daily determination of a bank’s short-term liquidity risk exposure as estimated by the volatility of its projected Singapore dollar cashflows.

In the second phase of the new Frame-work, a bank may be allowed to adapt its own liquidity risk model to determine its liquid asset requirement. A bank will be allowed to do so once it has developed and tested its internal model against industry data.

[The Financial Sector] [Regulatory Initiatives] [Legislative Changes] [Financial Advisers Act] [Risk-Based Regulation] [Supervisory Initiatives] [Depositor Protection] [Corporate Governance and Disclosure] [Developing The Disclosure Regime] [Prudential Guidelines for Financial Institutions] [Improved Conduct Practices]

[Regulatory Initiatives] [Developmental Initiatives] [Market Infrastructure]

[Table Of Contents]