MAS Announces Risk-Based Liquidity Requirement For Banks in Singapore

27 July 2001...The Monetary Authority of Singapore today announced a new risk-based Liquidity Supervision Framework for banks in Singapore. The Liquidity Supervision 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 liquidity risk management capabilities. This will enable banks with stronger liquidity risk management to have lower MLA requirements.

2   Under the Liquidity Supervision Framework, a bank can choose either to remain on the existing 18% MLA requirement or move to a risk-determined MLA requirement specific to the bank. The Framework will be implemented in two phases. In the first phase, from May 2002, banks that opt for the bank-specific MLA requirement will maintain MLA between 12% and 18%. In the second phase, expected to begin in May 2004, a bank will be allowed to use its own internal liquidity risk model to determine its liquid assets requirement. A bank will be allowed to do so once it has developed and tested its internal model against industry data.

3   A bank-specific MLA requirement will be determined by MAS based on two factors:

a) Liquidity Risk Management - The quality and rigour of the bank's liquidity risk management systems and processes, using a standardised methodology¹.

b) Cashflow Volatility - The bank's short-term liquidity risk exposure as estimated by the volatility of its daily projected SGD cashflows.

4   MAS also announced changes² to MAS Notice 613 on Minimum Cash Balances and Liquid Assets to give banks greater flexibility in managing their liquid assets portfolio:

i) Holdings of Singapore Government Securities (SGS)
Currently, within the 18% MLA requirement, banks are required to hold at least 10% of their liabilities base in SGS, with all 10% in the form of SGS purchased outright. Banks are also allowed to hold up to 5% of their liabilities base in SGS obtained via reverse repurchase agreements (reverse-repos).

To provide banks the latitude to use SGS held under reverse-repos to meet the 10% SGS requirement, the minimum required holding of SGS purchased outright will be revised to 5%. Further, the 5% cap on the total holding of SGS under reverse-repos as part of a bank's
overall MLA will be removed. These changes will take immediate effect.

ii) Minimum Cash Balances (MCB)

A bank's MCB is currently fixed at a minimum of 3% of its liabilities base at the close of each day. Under the revised requirement, the MCB will be allowed to fall below the 3% requirement on a daily basis, subject to a floor of 2%. However, the average closing MCB held over a fortnightly maintenance period must be at least 3% of a bank's liabilities base³. To give time for system modifications, the MCB averaging provision will take effect from 20 September 2001.

5   The key dates for the implementation of the Liquidity Supervision Framework are summarised and attached (84.2 KB) .

6   The Liquidity Supervision Framework and the changes to
MAS Notice 613 will allow banks to manage their SGS portfolios more actively and efficiently. The MLA requirement will vary between banks and over time. MAS is phasing in the new Liquidity Supervision Framework to minimise market disruption, and has drawn up measures to manage the transitory impact of the Framework on the market. These include adjustments to the SGS issuance programme and implementation of SGS purchase operations.

7   MAS said that the Liquidity Supervision Framework will provide the incentive for banks to adopt liquidity risk management systems that are in line with international best practices. Mr. Tharman Shanmugaratnam,
Managing Director of MAS stated, "The 18% MLA requirement has been a key feature of our regulatory framework for many years. The new Framework is a major step from 'one-size-fits-all' regulation to a risk-sensitive supervisory approach. Coupled with the reduction in MCB requirements from 6% to 3% and the change in composition of local banks' CAR in the last few years, the new liquidity requirements will lower banks' prudential costs without compromising their financial soundness or the stability of the financial system."

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² Details of the changes can be found on MAS Circular No. FSG 39/2001, which is available on the MAS website at www.mas.gov.sg.

³ Daily cash balance with MAS in excess of 4% of a bank's liabilities base will not be counted towards the computation of the fortnightly average MCB.