The Banking (Amendment) Bill: An Explanatory Brief
Date: 19 Apr 2001
1 As part of its ongoing review of the regulatory and legislative framework for the banking industry, MAS has introduced several new policies and measures to strengthen prudential safeguards and corporate governance, facilitate risk-focused supervision, provide banks with greater operational flexibility, and update regulations. Many of these policies and measures have already been announced over the past year. The enactment of the Banking (Amendment) Bill ("the Bill") will give effect to these policies and measures. The key changes in the Bill may be summarised as follows:
Strengthening Prudential Safeguards and Corporate Governance
separation of financial and non-financial activities of local banking groups;
revision of ownership rules for local banks following the lifting of the aggregate foreign shareholding limit;
revision of methodology for monitoring property-related exposure;
prohibition of unlicensed offering of deposit-taking services;
Facilitating Risk-Focused Supervision
- introduction of flexibility for MAS to prescribe institution-specific capital adequacy requirements on a supervisory basis;
Providing Banks with Greater Operational Flexibility
- reduction of paid-up capital requirements for local banking subsidiaries;
- redefinition of capital for foreign banks;
- revision of banking secrecy provisions;
- revision of penalties for contravention of the Banking Act;
- revision of rules on the payment of dividends by banks; and
- revision of requirements for the publication of banks' accounts.
STRENGTHENING PRUDENTIAL SAFEGUARDS AND CORPORATE GOVERNANCE
Separation of Financial and Non-Financial Activities of Local Banking Groups
2 In June 2000, MAS announced a policy to separate financial and non-financial businesses and to unwind cross-shareholdings within the local banking groups. The policy is aimed at limiting the risks of contagion from non-banking businesses to banks, enhancing market discipline, increasing transparency of transactions, and ensuring that bank management focuses its attention on core banking business amid increasingly competitive conditions. The unwinding of cross-shareholdings will further improve local banks' corporate governance through a clearer and more transparent ownership and control structure. It will also minimise conflicts of interest between bank and non-bank businesses. These measures will ultimately benefit depositors and shareholders, and strengthen the financial system as a whole.
3 The Bill imposes new provisions to:
- prohibit banks from undertaking businesses other than financial businesses and businesses approved by MAS;
- prohibit banks from acquiring a major stake in a company (defined essentially as a larger-than-10% stake or any interest which gives the bank significant influence over the management of the company) unless approved by MAS;
- prohibit any company not engaged in financial business from using any name, logo or trademark in a manner that would associate it with a bank incorporated in Singapore or its subsidiaries carrying on financial business;
- limit portfolio equity investments in a single company to 2% of the capital funds of the bank;
- limit holdings of immovable property to a reduced amount of 20% of bank's capital funds; and
- enable MAS to secure compliance with the above restrictions on a group basis.
4 The new measures will require local banks to undertake significant corporate restructuring and divestment of non-financial assets. To ensure that the process is undertaken in an orderly manner, the proposed amendments also provide a three-year grace period before the restrictions take effect. This three-year period will begin when the new provisions come into effect. The Singapore branches of foreign banks will also be subject to the above restrictions (a), (b), (d) and (e), except that their Asian Currency Units will be exempt from (d) and (e) as consistent with current policy.
Revision of Ownership Rules for Local Banks Following the Lifting of the Aggregate Foreign Shareholding Limit
5 In May 1999, MAS lifted the 40% foreign shareholding limit for Singapore-incorporated banks as part of its measures to liberalise the local banking industry. The provisions in the Banking Act relating to the control and ownership of Singapore-incorporated banks have been revised to ensure that, consequent to the lifting of the aggregate foreign shareholding limit, control of locally-incorporated banks rests with individuals or groups whose interests are aligned with the long-term interests of the Singapore economy, and these banks continue to retain their Singapore character.
6 Currently, MAS' approval is required before a single shareholder is allowed to increase shareholdings in a local bank above the 5% and 20% thresholds. The Bill introduces an additional 12% threshold, as announced in May 1999, at which MAS' approval is required. This new threshold provides an additional check, which gives MAS greater flexibility to allow strategic partners and large institutional investors to cross the 5% shareholding level, without having to also allow their stakes to grow unrestrained up to 20%.
7 The new sections will also have expanded scope to address passive increases in shareholdings and shareholders acting in concert. Legislative powers are also introduced for the Minister to object to persons previously allowed to exceed the threshold levels but who have subsequently become unacceptable as significant shareholders.
Revision of Methodology for Monitoring Property-Related Exposure
8 It is established supervisory practice to monitor banks' exposure to the property sector in order to minimise the vulnerability of the banking system to a property market downturn. Under current provisions in the Banking Act, loans secured by "immovable property for the purpose of purchasing, improving or altering" that property are limited to 30% of the bank's deposits in Singapore.
9 The Bill will empower MAS to implement, via regulations, an improved methodology, which incorporates the following refinements:
- redefining property loans to include all loans and debt instruments, whether secured or unsecured, for the purpose of property development or investment, regardless of the type of security for the loans;
- excluding owner-occupied housing loans from the relevant provision in recognition of their lower risk of default (MAS will subject banks to supervisory limits on such loans); and
- limiting property loans to a proportion of the bank's total non-bank loans and debt instruments so as to encourage diversification in the bank's loan portfolio. (The present rules limit property loans as a proportion of banks' deposits.) The limit will be stipulated in regulations, and set at 35% initially.
10 The new methodology will enhance monitoring and control of banks' exposure to the property sector. It is not intended either to loosen or tighten bank lending to the sector, nor should it do so.
Prohibition of Unlicensed Offering of Deposit-Taking Services
11 In line with practices in other reputable jurisdictions, the Bill introduces new provisions to clarify the prohibition against the conduct of deposit-taking business targeted at the Singapore market by entities that are not licensed by MAS. Such business would include advertising and/or offering deposit-taking services through the Internet or other channels. The restriction will not apply to companies which are not engaged in deposit-taking business and which may issue bonds and notes from time to time. It will also exempt deposit-taking institutions regulated by other Acts such as finance companies, credit co-operatives and institutions specified by MAS.
12 There will continue to be no prohibition against Singapore residents themselves seeking, via the Internet or otherwise, services of financial institutions not licensed in Singapore. Singapore customers who avail themselves of the services of financial institutions not licensed in Singapore do so at their own risk and must take responsibility for their financial decisions.
FACILITATING RISK-FOCUSED SUPERVISION
Introduction of Flexibility for MAS to Prescribe Capital Adequacy Requirements on a Supervisory Basis
13 Presently, the Banking Act requires local banks to maintain a minimum capital adequacy ratio (CAR) of 12% or any other ratio prescribed by MAS. The Bill will amend the Banking Act to give MAS authority to set, on a supervisory basis, bank-specific capital adequacy requirements above the minimum regulatory CAR that would apply to all banks.
14 All the Singapore banks are currently well capitalised. As our banks seek to innovate and take on new risks, and as they seek to manage their capital more efficiently, it is prudent that MAS impose capital requirements on individual banks according to their risk profiles and management capabilities. MAS intends to engage each bank in a consultative process, on an ongoing basis, to determine the appropriate level of capital that a bank should maintain. The merits of this risk-focused supervisory approach, which seeks to better align regulatory capital with economic capital, are increasingly being recognised by regulators in other leading jurisdictions. The introduction of supervisory flexibility enabled by the Bill marks an important preparatory step towards the implementation of the more risk-sensitive New Basel Capital Accord by Singapore banks.
PROVIDING BANKS WITH GREATER OPERATIONAL FLEXIBILITY
Reduction of Paid-Up Capital Requirements for Local Banking Subsidiaries
15 In July 2000, MAS issued an Internet Banking Policy Statement. To facilitate banks' adoption of new business models, such as Internet-only banking, MAS will award new full banking licences to Singapore-incorporated banks to establish banking subsidiaries with such new models. These new banking subsidiaries may be established in alliance with joint venture partners as long as the parent Singapore-incorporated bank retains control. The Bill introduces a new section to provide for a reduced minimum paid-up capital requirement of S$100 million for these banking subsidiaries. (The Banking Act currently requires a Singapore-incorporated bank to have paid-up capital of at least S$1.5 billion, whether or not it is a subsidiary.)
Redefinition of Capital for Foreign Banks
16 Presently, a bank with its head office outside Singapore is required to have not less than S$200 million paid-up capital. To deal with foreign banks whose home jurisdiction do not apply the concept of issued and paid-up capital, the Bill amends the Act to allow for the equivalent of paid-up capital applicable under the laws of that jurisdiction. It will also allow the bank's reserves to be included for the purpose of satisfying the S$200 million capital requirement. This will allow financially strong foreign banks with significant capital existing in a form other than issued and paid-up capital (e.g. reserves) to establish branches in Singapore.
Revision of Banking Secrecy Provisions
17. The banking secrecy provisions in the Banking Act are critical in protecting the confidentiality of customer information. However, current provisions are not flexible enough to allow banks to take full advantage of opportunities to cater to customer needs. The provisions also require banks to seek MAS' approval on a case-by-case basis for the outsourcing of banks' processing activities if these involve the handling of customer information.
18. Going forward, MAS intends to give banks greater operational flexibility in handling client information while putting in place sufficient safeguards to ensure that the confidentiality of customer information is not compromised. The Bill intends to achieve this balance by:
- imposing a statutory duty on both the bank and its officials to maintain the confidentiality of customer information;
- stipulating the circumstances under which banks can disclose customer information without MAS' prior approval; and
- imposing a non-disclosure obligation on parties receiving customer information from banks.
19 While the Bill will give commercial banks greater flexibility to pursue operational efficiency and cross-marketing strategies, information relating to deposits and funds placed for investment will continue to be subject to tight secrecy provisions.
Revision of Penalties for Contravention of the Banking Act
20 Most of the penalties for contravening the Banking Act have not been revised since 1984; some have even remained unchanged since 1970 when the Act was passed. As a result, the penalties no longer provide an effective deterrent, nor do they signal the seriousness of the intent of the law. MAS has revised the penalties in the Act to reinforce the importance of sound prudential standards and practices and to signal that any breach of these standards must be dealt with commensurately. The revised penalties are broadly in line with those in other major jurisdictions.
21 The Bill will amend the current penalties as follows:
- maximum fines will be increased by a factor of five (the maximum fine for the most serious offences will be $250,000 whilst the lowest maximum fine for less serious offences will be $25,000);
- in the case of continuing breaches after conviction, the fine per day will be fixed at one-tenth of the maximum fine;
- penalties imposed on corporates will be distinguished from those imposed on individuals by setting the fine for individuals at half the quantum for corporate offenders.
Revision of Rules on the Payment of Dividends by Banks
22 A bank is prohibited from paying any dividend on its shares until all its capitalised expenditure has been completely written off. Goodwill is such an item. It has been local banks' practice to write off goodwill against their reserves so that dividends can be paid. However, the new standards (SAS 22) prescribed by the Institute of Certified Public Accountants require goodwill to be capitalised and amortised over not more than 20 years generally, and to not be written off against reserves. In view of these new standards, the Bill will repeal the current prohibition.
Revision of Requirements for the Publication of Banks' Accounts
23 The Banking Act currently gives MAS the power to determine the form in which a bank publishes its accounts. This broad power is no longer necessary. In practice, MAS reviews the bank's accounts to assess its financial soundness and determine, in particular, if adequate provisions have been made on its loans and assets. MAS does not prescribe the form of presentation, verify the accuracy of the accounts, or decide on any other details in relation to the bank's accounts. This is the job of the Board of the bank. It is also the responsibility of the bank's external auditors to provide a view of the truth and fairness of the accounts.
24 The Bill will amend the Banking Act to limit MAS' discretionary powers to deciding on additional information, relating to a bank's financial condition and operations, that should be disclosed, apart from statutory requirements under the Companies Act.