Changes to the Capital Adequacy Requirements for Singapore-incorporated Banks
Singapore, 8 February 2007...The Monetary Authority of Singapore (MAS) has released details of changes to the capital adequacy requirements for Singapore-incorporated banks.
2 Effective from 1 March 2007, MAS will lower the Tier 1 capital adequacy ratio (CAR) requirement from 7% to 6%. The Total CAR requirement will remain unchanged at 10%.
3 MAS will also recognise a broader range of instruments as Tier 2 capital. These instruments can be of a shorter maturity and do not necessarily have to provide for deferment of coupons or write-down of principal. Up to 50% of Tier 2 capital can comprise these new instruments. MAS will also provide greater clarity on the rules for the redemption or repurchase of regulatory capital instruments.
4 The changes will apply to financial holding companies as well.
5 The progressive refinements to the CAR requirements over the years reflect MAS' ongoing efforts to maintain prudent requirements that are commensurate with the banks' risk profiles and enhanced risk management capabilities. The changes also keep MAS' regulatory framework in line with international best practices.
6 Ms Teo Swee Lian, MAS' Deputy Managing Director for Prudential Supervision, said, "The new requirements aim to strike a judicious balance between meeting our prudential objectives and providing scope for efficient capital management by the banks. We would expect banks to continue to manage their capital positions prudently, taking into account, among other things, their risk profiles, business plans and targeted credit ratings."
Note to editor:
Capital Adequacy Requirements for Singapore-incorporated Banks
MAS' minimum capital adequacy requirements for Singapore-incorporated banks are based on the capital adequacy framework established by the Basel Committee for Banking Supervision (Basel Committee) in its report 'International Convergence of Capital Measurement and Capital Standards', commonly known as the 1988 Basel Capital Accord ("Capital Accord").
2 The Capital Accord has been implemented in the Basel Committee countries since end 1992, and has since been adopted in more than 100 jurisdictions worldwide.
3 The Capital Accord prescribes minimum Tier 1 and Total capital adequacy ratios ("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 of these ratios should be measured:
- The numerator of the ratio (i.e. 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.
- The denominator of the ratio (i.e. 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.
5 From December 1992, Singapore-incorporated banks were 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:
- Since April 1997, Singapore-incorporated banks have been required to set aside capital for their market risks in accordance with the Basel Committee's 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. 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 increased the portion of the CAR requirement that can be met using Upper Tier 2 capital from 2% to 4%.
- In May 2004, MAS lowered the Tier 1 CAR requirement from 8% to 7% and the Total CAR requirement from 12% to 10%.
1 There have been five amendments to the original Capital Accord since it was published in 1988. In June 2004, ', commonly known as Basel II.