Reply to Parliamentary question on stress tests of the banks and insurance companies in Singapore
Question No 75
Notice Paper No 150 of 2011
For Written Answer
Date: For Parliament Sitting on or after 16 January 2012
Name and Constituency of Member of Parliament
Q75: Associate Professor Fatimah Lateef, MP for Marine Parade GRC
To ask the Deputy Prime Minister and Minister for Finance (a) what is the type of stress test that the Monetary Authority of Singapore (MAS) conducts on the banks and insurance companies locally to ensure financial stability and how frequently are such tests conducted; (b) how robust are these supervisory processes by MAS; and (c) if available, whether results of such audits or assessments can be made public.
1 MAS conducts periodic stress tests of the banks and insurance companies in Singapore. Their aim is two-fold: to assess financial institutions’ ability to withstand adverse financial and economic shocks, and to evaluate the potential impact on Singapore’s financial stability. These stress tests are normally conducted annually, although more frequent stress tests may be carried out when the situation warrants it, for example during the 2008-9 financial crisis. The most recent stress test, conducted in the early part of last year, shows that all major financial institutions would continue to maintain adequate capital buffers above MAS’ regulatory requirements under the prescribed stress scenarios.
2 MAS’ stress testing exercise has been subject to international peer review and is aligned with international best practice. Let me describe briefly how it works. MAS identifies a range of external and domestic risks as part of its ongoing financial surveillance operations. It also draws on risk assessments by international organisations such as the International Monetary Fund and the Financial Stability Board, and exchanges with other central banks and financial regulators, industry players and private sector analysts. MAS then develops scenarios using stressed values for key risk parameters, such as credit spreads, yield curves, economic growth, and property prices. Banks and insurance companies are then asked to conduct stress tests based on these scenarios. To ensure that the results are robust, MAS engages the financial institutions to challenge their underlying assumptions and review their stress test methodologies.
3 In addition to the industry-wide stress tests, MAS requires financial institutions to conduct more regular stress tests on their own to address risks that are specific to their operations. The boards of directors and senior management of financial institutions are expected to review the stress test scenarios and results as part of their risk management processes.
4 The last stress test conducted by MAS, in the early part of last year, showed that all major financial institutions would continue to maintain adequate capital buffers above MAS’ regulatory requirements under the prescribed stress scenarios.
5 Regulators in certain advanced economies have disclosed stress test results for individual institutions during the recent crises afflicting them, as a way to calm volatile markets and restore confidence in their banking systems. Like other jurisdictions whose financial systems have remained sound and stable, Singapore has not had to do so. MAS prefers to retain stress tests as a pre-emptive supervisory tool to encourage financial institutions to have appropriate capital planning processes and risk mitigation plans across a range of stressed conditions.
6 There are other sources that the public can use to assess the risks carried by financial institutions. These include the annual reports and published financial statements of financial institutions as well as reports by MAS such as the Financial Stability Review and Monthly Statistical Bulletin. MAS also continually reviews what additional data relating to risk can be published. For example, in July 2011, MAS decided to release more housing loan data to help the public assess housing market conditions and their impact on banks’ housing loan portfolios.