The Banking (Amendment) Bill
Second Reading Speech by Mr Lim Hng Kiang, Minister for Trade & Industry and Deputy Chairman, Monetary Authority of Singapore
1 Mr Speaker Sir, on behalf of the Senior Minister, I beg to move that the Bill be now read a second time.
2 Over the past few years, MAS has progressively liberalised the banking sector. At the same time, MAS has also sought to implement a risk-based supervisory approach that moves away from one-size-fits-all rules and allows for well-managed risk-taking. The measures have resulted in more choices to consumers, new innovative products and competitive pricing. With the free play of market forces and the growing complexity and international nature of banking business, there will also be new risks to be addressed. For example, depositors are increasingly exposed to the risks of both local and foreign banks' expanding international operations.
3 MAS continuously reviews and refines its regulatory framework to ensure that it is robust and responsive, without adding undue burden and cost to the industry; a framework that upholds prudential standards and the interests of depositors, while fostering the growth of the sector. The Banking (Amendment) Bill is part of this on-going process. It introduces several new policies and measures to strengthen prudential safeguards, facilitate risk-based supervision and provide banks with greater operational flexibility.
4 In preparing this Bill, MAS has consulted extensively with the industry and the public on the policy changes and the draft Bill. The feedback received was carefully considered, and incorporated into the Bill where practicable and consonant with its regulatory objectives.
5 Mr Speaker Sir, I will now go through the major amendments in the Bill.
STRENGTHENING PRUDENTIAL SAFEGUARDS
6 In terms of strengthening prudential safeguards for the protection of depositors, I shall elaborate on three main ones.
Revision of methodologies for limiting large exposures and related party exposures
7 Currently, section 29 of the Banking Act sets prudential limits on credit facilities extended by banks to a single borrower or a group of related borrowers. It also curtails unsecured credit facilities to parties related to the bank. These prevent the default of any single borrower from seriously impacting the financial strength of a bank.
8 MAS is introducing a number of changes to ensure that the prudential limits remain relevant and are in line with international best practice. First, instead of a limit based on credit facilities granted, the Bill introduces a more comprehensive measure based on exposures, which would include a bank's equity investment in, as well as other transactions with a counterparty. The second key change is that MAS will recognise a bank's efforts in mitigating risks, by allowing the bank to offset its exposures where these are secured by qualifying collateral, or to substitute its exposures to a counterparty with that of a credit protection provider of good rating. To reduce the risk of contagion and non-arm's length transactions between a bank and a related party, the current limit on unsecured lending to related corporations will be widened to restrict the exposures of a bank incorporated in Singapore to its substantial shareholder groups, and exposures of a bank in Singapore to entities in which the bank holds a major stake. The industry will be given a two-year grace period to make the appropriate adjustments for compliance with the revised section 29.
Introduction of an asset maintenance regime
9 MAS' liberalisation measures in the last few years have brought about greater foreign bank participation in our banking sector. While the competition has added to the dynamism of the banking sector, the banking system will increasingly be exposed to risks arising from the foreign banks' international operations. Should a foreign bank fail, the resolution of a cross-border bank insolvency will be complex and drawn-out. The claims of depositors and creditors will be subject to substantial uncertainty.
10 The revised section 40 aims to strengthen the foreign bank regulatory framework by requiring foreign full and wholesale bank branches to maintain a minimum level of eligible assets in Singapore in proportion to their deposit liabilities. This would help to improve the recovery of assets from a failed foreign bank branch in Singapore to meet the claims of Singapore depositors.
11 The asset maintenance requirement has been carefully calibrated to balance prudential objectives with banks' commercial interests, and determined after close consultation with the industry. A six-month grace period will also be given, for foreign bank branches to make necessary adjustments to their asset allocations.
Amendment of the priority ranking of deposit liabilities
12 Presently, both non-bank and inter-bank deposit liabilities of a bank rank ahead of other unsecured liabilities in the event of a winding up of a bank. In recognition that non-bank depositors are likely to be less well informed than banks and in greater need of protection, the Bill reorders the priority ranking under section 62 and places all non-bank deposit liabilities of a bank ahead of inter-bank liabilities, with the latter ranking pari passu with other unsecured creditors. This is consistent with the objective of protecting non-bank depositors and encouraging banks to exercise prudence and market discipline in respect of exposures to their bank counterparties.
ENHANCING MAS' ROLE IN BANK RESOLUTION
13 While MAS seeks to promote and preserve stability in the financial system through high standards of licensing, regulation and supervision, like many reputable regulators, it does not aim to prevent the failures of all financial institutions. Such a "zero-failure" regime is neither feasible nor desirable as it leads to considerable moral hazard for the regulator and places an excessive regulatory burden on financial institutions. When dealing with a bank in distress or insolvency, a private sector resolution option is often preferred by regulators, but in the event that this is not possible, international experience has shown that it is important for the regulator to be able to take action quickly to minimise losses to depositors and other creditors, and to maintain stability in the financial system. The Bill will accord MAS a wider role in the resolution process and a broader range of resolution options.
14 Specifically, the new section 54A provides MAS the right to be heard in insolvency proceedings of a bank and the power to approve the appointed liquidator. Part VIIA introduced by the Bill also empowers MAS, with the approval of the Minister in charge of MAS, to direct the sale of the business of a bank and in the case of a bank incorporated in Singapore, to require the issuance of new shares, to restructure the share capital or to sell existing shares to other investors. Before it can exercise these powers, MAS has to consider the interests of depositors of both the transferor and transferee, as well as the stability of the financial system in Singapore. The affected parties will be given a right to be heard prior to the Minister's approval of such a transfer, except where it is not practicable or desirable to do so, for instance, where an expeditious transfer is crucial in maintaining financial system stability.
FACILITATING RISK-BASED SUPERVISION AND ALLOWING OPERATIONAL FLEXIBILITY OF BANKS
15 Consistent with the risk-based supervisory approach adopted by MAS, the Bill will allow the calibration of prudential requirements according to an individual bank's financial strength, risk profile and risk management capabilities. Let me provide a few examples. The revised section 29 allows MAS to raise the large exposure limits for individual banks where there are strong justifications. Under section 40, a higher asset maintenance requirement may be imposed on banks that pose greater supervisory concerns. The amended section 38 will allow banks the operational flexibility to draw down their liquidity reserves to deal with liquidity stress situations. In addition, in view of the industry's need to move nimbly in a fast-paced environment, the new section 76A will allow MAS to grant exemptions from requirements in the Act in specific cases where the prudential objectives are not compromised.
EXPANDING THE REGULATORY SCOPE FOR CREDIT CARD ISSUANCE
16 Under the current regime, only banks and non-bank financial institutions are subject to MAS' rules on the issuance of credit cards. New Part VIII extends MAS' regulatory scope to all issuers targeting the Singapore market and not just banks and financial institutions. Entities that have not been approved to issue credit cards in Singapore will be prohibited from soliciting for or accepting card applications in Singapore, and this applies equally to third parties acting on their behalf. MAS will be empowered to inspect the operations of approved card issuers for compliance with MAS' rules pertaining to credit card operations.
17 The proposed regime also clarifies that single party merchant credit is exempted from regulation. Such an arrangement, where the card is used only for transactions with the issuer, is essentially a deferred payment scheme offered by merchants to their customers. In addition, a new exemption for cards granting credit in small amounts not exceeding S$500 will be introduced. This allows flexibility in payments for small-ticket items without raising substantial concerns about Singaporeans spending beyond their means.
18 Let me now turn to the other significant amendments that update the banking regulatory framework:
(a) Section 22, which requires a bank to maintain a reserve fund, will be repealed in light of enhancements to MAS' regulatory framework over the years, and banks will be allowed to release their reserves over a five-year period.
(b) Section 5, which restricts the use of the word "bank" to protect consumers from being misled as to the status of the entity they are dealing with, will be amended to accommodate legitimate uses, such as representative offices of foreign banks; international financial institutions like the World Bank, Asian Development Bank; or where it is used in a non-financial sense, such as "Blood Bank", "Infobank".
(c) The amendment to section 4B will provide flexibility for MAS to exclude or include any financial product from or in the definition of deposit. This is necessary to facilitate MAS' response to innovative products that either legally satisfy the definition of "deposit" but do not meet the economic characteristics of a deposit, or conversely meet the economic characteristics of a deposit but do not satisfy the legal definition of "deposit". An example of the latter is a murabaha investment - an Islamic variant of a time deposit. Products that are prescribed as deposits will be accorded priority ranking in the event of a bank winding-up and protection under the deposit insurance scheme.
(d) The amendments to section 26 will permit MAS to disclose only non-customer information provided by banks to MAS under limited circumstances such as for the purpose of sharing aggregate information at international fora and contributing to research projects. This is to balance MAS' responsibility for surveillance and supervision of the financial sector with its commitment to preserve the confidentiality of individual banks' information.
(e) To underscore the importance of accurate reporting of information to MAS, section 66 will be amended to extend the obligation - currently imposed on directors and executive officers to any person who furnishes information to MAS to exercise due care in ensuring that it is not false or misleading.
(f) New section 54B will explicitly provide MAS with the powers to direct the removal of directors from the board of a Singapore-incorporated bank, if these persons fail to perform their duties and functions, to protect public interest and depositors. This is in line with international standards and the practices in reputable jurisdictions.
19 Mr Speaker Sir, a sound and vibrant financial sector is an integral part of ensuring the success and resilience of the Singapore economy. These amendments to the Banking Act are part of an on-going process to enhance the robustness and responsiveness of our banking regulatory framework, in tandem with the growth in scope and sophistication of the activities of the banks in Singapore.
20 Mr Speaker Sir, I beg to move.