Changes to the Capital Adequacy Requirements for Singapore-incorporated banks
Singapore, 28 May 2004...The Monetary Authority of Singapore (MAS) today released details of changes to the capital adequacy requirements for Singapore-incorporated banks.
Effective from 30 June 2004, MAS will lower the Tier 1 capital adequacy ratio (CAR) requirement from 8% to 7%, and the Total CAR requirement from 12% to 10%. MAS will also make a number of adjustments to the rules for computing CAR. The major adjustments are the following:
Banks will be allowed to include 45% of the revaluation surpluses from property assets as well as portfolio equity investments as Upper Tier 2 capital.
Banks will be required to set aside more capital for significant investments, with significant investments in non-financial companies attracting a higher capital charge than significant investments in financial companies. The new treatment for significant investments better reflects the risks commensurate with them.
Banks with insurance subsidiaries will be required to exclude these subsidiaries for purposes of meeting their CAR requirements on a banking group basis.
Banks will be allowed to use funds raised from Qualifying Preference shares and Innovative Tier 1 capital instruments to meet no more than 30% of their Tier 1 CAR requirements.
The changes will also apply to financial holding companies.
The detailed rules for computing CAR, including eligible Tier 1 and Total Capital, and risk-weighted assets are contained in MAS Notice 637 on "Risk Based Capital Adequacy Requirements for Banks Incorporated in Singapore", issued today.
In announcing the changes to capital adequacy requirements for Singapore-incorporated banks, Mr John Palmer, Deputy Managing Director, MAS said, "These changes are the result of a careful and thorough review of capital adequacy requirements in other leading jurisdictions. We believe the new requirements are prudent but competitive, and more sensitive to the banks' actual risk profiles. They are likely to result in a reduction in total capital adequacy requirements that is material, but somewhat less than the reduction implied by the drop in the Total CAR requirement from 12% to 10%. This reduction in regulatory capital will not necessarily lead banks to immediately reduce their actual capital levels. Banks will still need to take into account other factors in managing their capital positions. This includes their own assessments of the adequacy of capital relative to risks, their future expansion plans, as well as their targeted credit ratings."
A background document is attached below.
Background on 1988 Basel Capital Accord and Capital Adequacy Requirements for Singapore-incorporated Banks
The minimum capital adequacy requirements which MAS imposes on Singapore-incorporated banks is based on the capital adequacy framework established by the report "International Convergence of Capital Measurement and Capital Standards", commonly known as the 1988 Basel Capital Accord ("Capital Accord")1.
The Capital Accord was implemented in Basel Committee countries since end 1992, and has since been adopted in more than 100 jurisdictions worldwide.
The Capital Accord prescribes a minimum Tier 1 and Total capital adequacy ratio (CAR), both of which are ratios of regulatory capital to risk weighted assets, of 4% and 8% respectively. The Capital Accord prescribes how the numerator and the denominator should be measured:
The numerator of the ratio (regulatory capital) represents the amount of capital a bank has available to buffer losses. Regulatory capital can be divided into core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Tier 1 capital consists of shareholders' funds (equity capital and disclosed reserves), and innovative capital instruments (up to a maximum of 15%) that closely resemble the characteristics of shareholders' funds, less certain deductions such as goodwill and intangible assets. Tier 2 capital may consist of revaluation reserves, unencumbered general provisions, and funds raised from issuance of subordinated debt instruments. 2
The denominator of the ratio (risk weighted assets) is a measure of risks faced by a bank. Different categories of assets and off-balance sheet exposures are weighted according to their relative riskiness.
Since December 1992, Singapore-incorporated banks have been required to meet a minimum CAR requirement of 12%. Initially, Singapore-incorporated banks had to set aside capital for only credit risks, and had to meet the entire 12% requirement with shareholders' funds (paid-up capital and disclosed reserves). Over the years, MAS had made progressive adjustments to the requirements:
Singapore-incorporated banks have since April 1997 been required to set aside capital for their market risks in accordance with the "1996 Amendment to the Capital Accord to Incorporate Market Risks".
In November 1998, MAS allowed banks to meet up to 2% of the 12% requirement with Upper Tier 2 capital. Upper Tier 2 capital consisted of a portion of banks' unencumbered general provisions and subordinated debt instruments that met MAS' requirements.
In November 1998, MAS also allowed banks to use funds raised from Innovative Tier 1 capital instruments to meet up to 15% of their Tier 1 CAR requirements.
In September 2000, MAS further lowered the minimum Tier 1 component from 10% to 8%. Total minimum CAR remained at 12%.
Even with the progressive adjustments to CAR requirements over the years, the Tier 1 and Total CAR requirements of 8% and 12% respectively are still higher than those applicable in other major financial centres. As part of MAS' ongoing efforts to keep our regulatory framework up-to-date with international best practices, it started a review of the CAR requirements in March last year which culminated in the package of revisions announced by Chairman of MAS yesterday.
The package of revisions consists of three components:
The lowering the Tier 1 CAR requirement from 8% to 7%, and the Total CAR requirement from 12% to 10%.
A number of changes to the rules for computing CAR.
A refined framework for setting Supervisory CAR add-ons.
Singapore-incorporated banks with lower risk profiles and that are better managed can be expected to enjoy lower regulatory CAR requirements than before. MAS believes that package of revisions achieves an appropriate balance between two objectives: on one hand, there is greater flexibility for banks to effectively meet the competition, and on the other hand, the maintenance of high prudential standards generally observed by leading banking supervisors.1 There have been five amendments to the original Accord since it was published in 1988. Four of the amendments carry specific changes to the language of the original Accord. The fifth amendment, which introduces capital requirements for market risk, does not include language to amend the 1988 text. This amendment issued in January 1996 and effective August 1996 is published as "1996 Amendment to the Capital Accord to Incorporate Market Risks".2 The Capital Accord also makes reference to a concept of Total capital, which consists of Tier 1 and Tier 2 capital, less certain deductions, which can be required from Tier 1 capital or the sum of Tier 1 and Tier 2 capital.