Date: 19 Jul 2000

1   POLICY APPROACH

1.1   Technology is changing the business of banking. The Internet has opened up new strategies and processes across the value chain of banking, including service delivery, customer relationship management, payment and settlement, and risk management. These innovations can significantly benefit banks and consumers by improving efficiency, and enhancing competition, price transparency, and convenience to customers.

1.2   Two broad business models have emerged in Internet banking: first, Internet banking within existing banks, either as an additional channel for its traditional core services or in the form of a specialised division; second, standalone entities, such as Internet-only Banks (IOBs), owned either by existing banks or by new players entering the banking industry.

1.3   MAS has completed the review of its current framework for licensing, and for prudential regulation and supervision of banks, to ensure its relevance in the light of developments in Internet banking. MAS' existing policy already allows all banks licensed in Singapore to use the Internet to provide their banking services. Going forward, MAS will maintain a broad and flexible prudential framework to allow for continued innovation in technology and new business models, as well as the licensing of new players.

1.4   The risk considerations inherent in Internet banking are not new or fundamentally different from those posed in other forms of banking. MAS will therefore subject Internet banking, including IOBs, to the same prudential standards as traditional banking. MAS' admission criteria for new licence applicants, and its regulatory and supervisory approach, will apply across the board.

1.5   MAS is prepared to grant new licences to Singapore-incorporated banking groups to set up banking subsidiaries if they wish to pursue new business models outside their existing banking entities. This will give banks the flexibility to decide whether to engage in activities such as Internet banking through a subsidiary, or within the bank (in which case no additional licence being required). MAS is also prepared to admit branches of foreign-incorporated IOBs, within the existing framework of admission of foreign banks. The details of these licensing changes are set out in Section 2.

1.6   The current framework for prudential regulation and supervision already provides flexibility for innovation in new business models. We do not require a new framework to facilitate innovations in Internet banking or to mitigate its risks. However, as certain types of risk will be accentuated in Internet banking, banks will have to emphasise different aspects of risk management, and the focus of MAS supervision will match this.

1.7   As in traditional banking, a risk-focused supervisory approach, tailored to individual banks' circumstances and strategies, will be more appropriate than "one-size-fits-all" regulation. Depending on the overall risk profile of the individual bank, MAS may in specific cases require the bank to take additional prudential measures to mitigate these risks. The key risk management issues to be addressed through MAS supervision are dealt with in Section 3.

2   LICENSING OF NEW BANKS

2.1   In assessing an application for a new banking licence for a Singapore-incorporated banking subsidiary or a foreign bank branch, MAS takes into account the following factors:

1. track record, reputation and financial soundness of the applicant and its parent institution/major shareholders;
2. strength of home country supervision, and the willingness and ability of the home supervisor to co-operate with MAS;
3. whether the applicant has a well-developed strategy in banking or financial services, supported by business plans which include a detailed assessment of the continued economic viability of the business; and
4. whether the applicant has sound risk management systems and processes, including management of security, technology-related and liquidity risks, and adequate procedures to meet know-your-customer requirements.

2.2   Licences for Subsidiaries of Singapore-Incorporated Banking Groups

2.2.1   MAS is prepared to grant licences to existing Singapore-incorporated banks to establish banking subsidiaries to pursue new business models. Should a Singapore-incorporated bank choose to do so in alliance with joint-venture partners, MAS will require the Singapore-incorporated bank to have control over the venture. The requirements for control are set out in Annex 1. MAS will also assess the suitability of the joint-venture partners, taking into account, among other things, their reputation, track record and financial soundness.

Minimum Paid-Up Capital Requirement for Subsidiaries of Singapore-Incorporated Banking Groups

2.2.2   The Banking Act currently requires a Singa-pore-incorporated bank to have paid-up capital of at least S$1.5 billion. This is a major obstacle to a Singapore-incorporated bank setting up new subsidiaries such as IOBs. MAS will therefore impose a reduced minimum paid-up capital requirement of S$100 million on banking subsidiaries of Singapore-incorporated banks who have already met the S$1.5 billion capital requirement, provided the parent bank has control over the subsidiary. The lower minimum paid-up capital requirement will apply to all Singapore-incorporated bank subsidiaries, new and existing.

2.2.3   The new S$100 million minimum is still higher than international norms. Besides paid-up capital, all banking subsidiaries will continue to be subject to MAS' minimum Capital Adequacy Ratio (CAR) requirement, currently 12%, which is also above minimum requirements elsewhere. MAS will continue to supervise the Singapore-incorporated banking groups on a consolidated basis, including assessing the overall capital adequacy of the banking groups.

2.3   Licences for Branches of Foreign Banks

2.3.1   MAS' current admission framework for branches of foreign banks allows admission of new or non-traditional players. Such banks may be owned either by existing banks or by non-bank players who have ventured into the banking business.

2.3.2   New or non-traditional foreign banks will have to meet the same entry requirements as traditional banks as set out in paragraph 2.1. New banking players who lack a long-enough track record will still be considered, provided they have strong compensating factors in respect of the other criteria set out. However, in all cases MAS will require new players to be incorporated in jurisdictions with a strong regulatory environment, and to have a home supervisor able and willing to co-operate in MAS' supervision of the bank.

2.3.3   MAS will continue to issue offshore banking licences to foreign banks which meet its admission standards. New players applying for full or restricted banking licences will have to compete with other foreign banks for licences awarded under the MAS' liberalisation programme for the domestic banking sector.

3   RISK-FOCUSED SUPERVISION OF INTERNET BANKING OPERATIONS

3.1   The types of risk inherent in Internet banking, whether offered within existing banks or in standalone entities such as IOBs, do not fundamentally differ from those in traditional banking. However, some of these risks will be accentuated in Internet banking, and will require greater attention by the banks and by MAS when it supervises them. Given that there may be different models of Internet banking in play, a risk-focused supervisory approach to individual banks is more suitable than "one-size-fits-all" regulation.

3.2   It is the responsibility of bank management to have in place, on an ongoing basis, clear strategies and processes to manage the risks of Internet banking operations. MAS will require public disclosure of such undertakings, as part of its requirement for all banks to enhance disclosure of their risk management systems.

3.3   Methods and tools of risk management and supervision will continue to evolve, in step with innovation in technologies and business strategies. MAS will maintain a continuing dialogue with banks on best practices in risk management systems and processes. MAS will soon issue a consultative document on Internet banking security and technology risk management. MAS will also work with other major regulators to develop supervisory perspectives on emerging risk issues, and co-operate with them to ensure effective cross-border supervision of banks.

3.4   Accentuated Risks for Internet Banking

3.4.1   Bank managements must pay special attention to the security, technology-related, liquidity and operational risks which may be accentuated in their Internet banking operations.

3.4.2   With regard to security and technology-related risks, banks should:

1. implement appropriate workflow, authentication, and process and control procedures surrounding physical and system access;
2. develop, test, implement and maintain disaster recovery and business contingency plans;
3. appoint an independent third-party specialist to assess its security and operations; and
4. communicate clearly to customers their policies with regard to the rights and responsibilities of the bank and customer on all matters to do with online transactions, in particular issues arising from breaches and errors in security, systems and related procedures.

3.4.3   International experience suggests that Internet banking customers tend to be more price sensitive, and hence more likely to move their deposits from one bank to another. This tendency is reinforced by the convenience of conducting Internet transactions. Technology failures that disrupt or impair services may also trigger abnormal transactions by customers. This potential for more volatile transactions could increase liquidity risk. Banks, especially IOBs, should therefore establish robust liquidity contingency plans, and appropriate asset-liability management systems.

3.4.4   Banks may also face greater operational risk if they extensively outsource processing operations in Internet banking. Banks should carefully manage such outsourcing of operations. They should maintain comprehensive audit trails of all such operations, and provide MAS with unrestricted access to such information, as in traditional banking.

3.4.5   IOBs, in addition, may face higher business risk arising from their new business models. To manage business risk, IOBs must maintain and continually update a detailed system of performance measurement. Efforts to build market share through pricing strategies and advertising must be tested against robust market assumptions. Unlike other Internet ventures, banks can ill-afford to incur losses for long start-up periods.

4   CONCLUSION

4.1   MAS will continue to stay abreast of developments in the financial industry and continue its dialogue with market participants so as to keep its licensing, regulatory and supervisory approaches effective and up-to-date. We will maintain a sound but flexible prudential framework, which seeks to preserve public confidence in the financial system, and encourage banks to uphold high standards of risk management. It will also seek to enable institutions to take full advantage of new technologies to innovate, compete and improve efficiency.

4.2   Banks are responsible for assessing and managing the risks associated with their operations, including the adoption of new technologies and business models. Financial institutions should inform consumers of both the benefits and risks of the financial products and services they offer. MAS encourages financial institutions and industry associations such as the Association of Banks in Singapore (ABS) to play a proactive role in educating consumers on these benefits and risks. MAS is also requiring financial institutions to disclose more information about themselves, so that the market and consumers can assess them more easily and accurately.

4.3   Internet banking has the potential to improve services for the public. However, consumers must still not neglect to assess for themselves the institution that they bank with, and the services they use, whether over the Internet or in traditional banking.

Annex 1 - Control Over the Banking Subsidiary

MAS is prepared to grant licences to existing Singapore-incorporated banking groups who wish to establish banking subsidiaries to pursue new business models such as IOBs. This will give a Singapore-incorporated bank the flexibility to decide whether to engage in Internet banking by way of a subsidiary or by using a division within the bank (in which case no additional licence being required). Should a Singapore-incorporated bank choose to set up a subsidiary in alliance with joint-venture partners, MAS will require the Singapore-incorporated bank to have control over the venture. The requirements for control are as follows:

1. The Singapore-incorporated parent bank must maintain more than 50% shareholding in the subsidiary bank. Subsequently, after the subsidiary has become well-established and demonstrated its viability, MAS is prepared to consider allowing the Singapore-incorporated parent's shareholding to fall to 50% or below. In such cases MAS will require that the Singapore-incorporated parent bank retains the largest shareholding and effective management control of the venture.
2. The Chairman of the subsidiary bank must be appointed by the Singapore-incorporated parent. This is in addition to the requirements under MAS Notice 622 regarding nominating committees and appointment of directors and chief executives of Singapore-incorporated banks.
3. The Singapore-incorporated parent bank and any alliance partners involved must furnish Letters of Undertaking ("LUs") pledging their support for the new subsidiary bank. For a joint-venture partner, the LU must be provided by a party acceptable to MAS. This strong party could be the partner itself, or one or more of its parents or associated companies.
   

   Click here for the MAS Announcment on Internet Banking Policy.