Two financial panels set up to formalise private sector consultation

Speaking at a dinner held at the Shangri-La Hotel last night, Deputy Prime Minister Lee Hsien Loong paid tribute to the efforts of the 5 private sector committees which contributed to the work of the Financial Sector Review Group (FSRG). The 5 committees are the Finance and Banking Competitiveness Sub-Committee chaired by Mr Peter Seah; the Committee on Banking Disclosure chaired by Mrs Elizabeth Sam; the Corporate Finance Committee chaired by Mr Lim Yong Wah; the Stock Exchange of Singapore Review Committee chaired by Mr Lim Hua Min; and the Committee of Governance of Exchanges chaired by Mr Tharman Shanmugaratnam.

DPM Lee, who is the chairman of the FSRG, praised the boldness and conviction of the committees to change old practices and to propose far-reaching changes in the areas which they reviewed. Describing the key roles played by the committees, DPM Lee said that the committees "helped to tap industry expertise, and to develop the industry consensus and common purpose in a manner which the FSRG could not have achieved by itself."

FORMALISE PRIVATE SECTOR CONSULTATION

DPM Lee also announced that MAS was setting up two private sector advisory panels to institutionalise consultation with the financial industry. "We must continue to encourage this productive public-private sector collaboration and cross-pollination of ideas," he said.

The two private sector bodies are the Financial Sector Advisory Council and the International Advisory Panel.

Financial Sector Advisory Council (FSAC)

The FSAC will facilitate regular dialogue with market participants in Singapore. Its objectives will be to:

• provide MAS with feedback on regulatory issues;
• help MAS identify emerging market trends and new development opportunities for Singapore;
• gather and facilitate exchanges of views with market participants in Singapore and internationally, and promote the adoption of international best business practices here.

The FSAC will be chaired by Mr S Dhanabalan, Chairman of DBS Bank. The rest of the members of the FSAC will be announced soon.

International Advisory Panel (IAP)

The IAP will comprise 10-12 distinguished market participants, consultants and regulators from around the world. The IAP will:

• advise MAS on trends in the global financial industry, emerging business lines and new growth opportunities;
• help MAS keep abreast of market developments and policy initiatives in major international centres; and
• provide MAS with insights into international best practices in central banking and financial supervision.

Mr J Y Pillay will be the first chairman of the IAP. The other members of the IAP are listed in Appendix 1. The inaugural meeting of the IAP is scheduled for January 1999.

BANK SUPERVISION

In banking supervision, DPM Lee said that MAS has progressively moved away from a "one-size-fits-all" approach to more risk-based methods. More regular supervision and monitoring of risk profiles will help MAS reduce high across-the-board regulatory requirements.

Review of Capital Adequacy Ratio

Following the reduction of the Minimum Cash Balance for banks from 6% to 3% in July, MAS will take a second step to refine the Capital Adequacy Ratio (CAR) that banks are required to maintain. This is aimed at allowing local banks to operate more flexibly and to grow their local and regional operations, but without compromising prudential standards.

With effect from 1 Dec 98, MAS will maintain the 12% CAR, but permit a change the composition of the CAR. Of the 12%, banks will be required to have at least 10% in Tier 1 capital. They can meet the remaining 2% with Upper Tier 2 capital.

MAS will also expand the definition of Tier 1 capital to include restricted forms of "equity-like" capital instruments, up to a cap. However, MAS will define Upper Tier 2 capital more stringently than under BIS standards. (Please see Appendix 2 for details.) These adjustments to CAR are in line with international norms, and do not represent any lowering of prudential standards.

Review of Minimum Liquid Asset requirement

The third step in MAS' review of banks' capital and liquidity requirements will be to refine the banks' Minimum Liquid Asset (MLA) requirement. The current MLA of 18% of banks' liabilities base provides a substantial cushion for banks against potential liquidity difficulties, but it is not the most efficient way for banks to manage their liquidity difficulties.

MAS will consider how to lower this across-the-board MLA requirements, and place more importance on banks' internal systems of liquidity management. MAS is currently studying the best practice among overseas regulators, and will consult closely with the banks over the next 6 months to establish an appropriate liquidity supervision framework, before deciding on the new requirements.

PROGRESS IN FINANCIAL SECTOR

DPM Lee said that the FSRG had reviewed and built on existing strategies and regulations, as well implemented fresh initiatives aimed at capturing emerging opportunities. The financial sector strategy studies by McKinsey and Company and Arthur D. Little provided the FSRG with an international perspective and strategic advice on emerging industry trends.

DPM Lee said that, notwithstanding the current economic crisis, he was cautiously optimistic about the prospects for Singapore's financial sector in the medium term. The goal was to make Singapore become a premier full-service financial centre in Asia and the world over the next five years.

DPM Lee also stressed the importance of nurturing and upgrading local talent, while attracting and retaining top international talent. He added that the Financial Sector Development Fund, to be set up from the proceeds of sales of shares in the new combined exchange, will provide resources needed to do this.

Appendix 1

MAS INTERNATIONAL ADVISORY PANEL (IAP)

Mr J Y Pillay (Chairman)
Member of the Board of Directors of MAS

Mr Alfred R Berkeley
President
The Nasdaq Stock Market, Inc

Dr Rolf-E Breuer
Spokesman of the Board of Managing Directors
Deutsche Bank AG

Mr Maurice R Greenberg
Chairman
American International Group, Inc

Mr Toyoo Gyohten
President
Institute for International Monetary Affairs

Mr Jan Kalff
Chairman
ABN AMRO Bank N.V.

Mr Yoh Kurosawa
Chairman
Industrial Bank of Japan

Mr John Mack
President
Morgan Stanley Dean Witter & Co.

Mr Michel Pebereau
Chairman
Banque Nationale de Paris

Sir Brian Pitman
Chairman
Lloyds TSB Group plc

Mr John Reed
Chairman
Citibank NA

Mr Douglas Warner
Chairman
J P Morgan & Co, Inc

Appendix 2

REVIEW OF CAPITAL ADEQUACY RATIO

Notes:

• Since 1992, Singapore banks have been required to maintain a CAR of 12%, comprising entirely of Tier 1 capital, ie equity. This is much higher than the BIS standard of 8%, which consists of only 4% Tier 1 capital. The remainder can consist of cheaper Tier 2 capital.
• Singapore banks are therefore well-capitalised, above BIS standards. However, this raises the cost of funds to the bank and lowers its return on equity. The requirement that the entire 12% of CAR consist of Tier 1 capital will constrain the flexibility of the banks to fund themselves when they grow their local and regional operations, particularly as economic conditions turn around.
• With the review, the 12% CAR will be maintained. However, with effect from 1 Dec 98, MAS will permit the composition of the 12% CAR to be changed. Of the 12%, banks will be required to have at least 10% in Tier 1 capital. They can meet the remaining 2% with Upper Tier 2 capital.
• MAS will also expand the definition of Tier 1 capital to include restricted forms of "equity-like" capital instruments, up to a cap. These have been recently endorsed by BIS, and have been allowed by several developed countries for some time.
• MAS will define Upper Tier 2 capital more stringently than under BIS standards. Upper Tier 2 will include funds raised from hybrid and long-dated subordinated debt instruments which satisfy MAS' conditions, and a limited portion of banks' unencumbered general provisions. Unlike the BIS and most other regulators, however, MAS will not allow revaluation surpluses from banks' holdings of shares or property to be counted as Upper Tier 2 capital. MAS will also not allow any Lower Tier 2 capital like conventional subordinated debt, or shorter term Tier 3 debt instruments.