41st Association of Banks in Singapore Annual Dinner
Raffles City Convention Centre,
Tuesday, 24 June 2014

“Making the Banking System More Resilient”

Chairman and Council members of ABS,
Ladies and Gentlemen

It is my pleasure to be here this evening. 

An Uneven Global Recovery

2   The global economy continues to recover.  Economic activity in the US has rebounded from a weak start, and is expected to pick up pace in the second half of 2014.  The Eurozone and Japan should post modest growth for the year as a whole, supported by highly accommodative monetary policies.

3   The upturn in the advanced economies bodes well for Asia.  In China, the authorities are addressing financial vulnerabilities even while attempting to restructure the economy for longer-term growth.  The decisive election result in India has raised high hopes for an investment-led turnaround in the economy.  Barring shocks, the Singapore economy can be expected to grow by 2-4% in 2014.

4   On the financial front, an uneasy calm seems to have settled in markets  but we remain in uncharted waters as the US proceeds to unwind its unprecedented monetary stimulus.  Banks and regulators must still be vigilant against obvious and hidden risks, and be prepared for bumps on the road to global interest rate normalisation.

Regulating for Resilience

5   MAS works closely with the industry to strengthen the resilience of Singapore’s financial system. MAS’ regulatory policy focuses on securing the safety and soundness of individual financial institutions as well as of the system as a whole. A key guiding principle of MAS’ approach to regulation is that rules must be outcome-focused and risk-appropriate. We achieve this through active engagement with the industry and alignment with international standards.

6   Following the Global Financial Crisis, the international regulatory community has come together to strengthen the resilience of banks and banking systems through the Basel III reforms under the Basel Committee of Banking Supervision. There are three main thrusts under this reform agenda.

• First, to enhance the quality and quantity of capital that banks are required to hold;
• Second, to strengthen the liquidity buffers that banks must have; and
• Third, to address the problem of “too-big-to-fail” by holding systemically  important banks to higher regulatory standards.

MAS has been closely involved in these international regulatory reform efforts.

7   Strong capital resources cushion a bank against losses. This improves its solvency as a going concern, and in extremis, offers a measure of protection to depositors and helps insulate the wider system against spillovers in the event of a bank resolution.

8   I set out MAS’ approach to bank capital adequacy when I addressed the ABS three years ago. MAS has consistently required locally-incorporated banks to maintain higher levels of regulatory capital than the international regulatory minimum, taking into account the risks they face and their systemic importance. Equally, if not more important, we have been prudent in recognising only good quality capital under our rules. The Basel III reforms, centred on a renewed emphasis on higher levels of good quality capital, validate MAS’ approach to capital adequacy.

9   But strong capital positions alone are no guarantee against financial instability. The near melt-down of financial systems in several advanced economies a few years ago is illustrative.

10   First,  banks with adequate capital resources may still face severe difficulites during periods of stress arising from liquidity mismatches between inflows and outflows of funds. Both Northern Rock in the UK and Bear Stearns in the US were considered well-capitalised and even reported profits prior to their collapse. But their inability to meet payment obligations as liquidity dried up led to the failures of these institutions.

11   Second, the financial difficulties of a large complex bank in distress can extend far beyond the institution and threaten the stability of the overall financial system and even the national economy. The failure of Lehman Brothers, which was at the centre of a web of complex financial contracts, unleashed a financial crisis of global proportions.

12   A comprehensive regulatory approach to banking resilience must therefore include frameworks to address liquidity risk and the challenges posed by systemically important banks. This evening, I will outline MAS’ new framework for bank liquidity requirements and the proposed framework for systemically important banks.

Domestic Systemically Important Banks

13   I will start with the framework for systemically important banks. MAS will be issuing a consultation paper on its proposals shortly.  Let me explain some of the thinking behind the framework.

14   Large global banks are often systemically important, yet their size, complexity, and cross-border nature, make them particularly challenging to regulate and supervise.  The failure of these banks can have global repercussions.  The Financial Stability Board (FSB) has identified a group of such banks – referred to as global systemically important banks, or “G-SIBs” – and established a range of measures to enable more effective regulation and supervision of these G-SIBs.

15   Regulators have established supervisory colleges and crisis management groups (CMGs) to improve their prudential oversight of internationally active banks, many of which have systemic significance in host jurisdictions. MAS is a member of the supervisory colleges of many international and regional banks and also hosts supervisory college meetings for the three local banking groups which have extensive operations in the region. In addition, MAS participates in the cross border CMG meetings of six global systemically important banks. These meetings provide a platform for home and host supervisors to exchange information and coordinate cross-border supervision.

16   At the international level, the Basel Committee has proposed setting higher loss absorbency (HLA) requirements for G-SIBs. The HLA aims to increase the capital buffers that G-SIBs hold, so as to reduce their probability of failure by increasing their capital buffers. The Basel Committee has also followed up with a set of principles for national regulators to develop their own frameworks for domestic systemically important banks, or “D-SIBs”.

17   As part of its on-going prudential oversight of the banking sector, MAS performs regular risk and impact assessments of each bank in Singapore to calibrate the appropriate level of supervisory attention. Drawing on the crisis experiences in other countries and international discussions on systemically important banks, MAS will build on its existing supervisory diagnostic tool to formalise an explicit D-SIB framework. To assess a bank’s systemic importance, MAS will use factors such as its size, interconnectedness to the financial system, substitutability of the institution, and its overall complexity. Further details will be set out in MAS’ consultation paper.

18   An explicit D-SIB framework will allow MAS to set targeted and appropriate policy measures for systemically important banks. For example, D-SIB bank branches with a significant retail presence will be required to locally incorporate their retail operations.  MAS proposes to regard a bank as having a significant retail presence if its market share of resident non-bank deposits is 3% or more, and if it has 150,000 or more depositors with accounts less than or equal to S$250,000.

19   Locally-incorporated D-SIBs will continue to hold 2% points of capital above the international Basel III regulatory minimum.

20   D-SIBs will also be required to have well-developed recovery and resolution plans. Requirements for recovery and resolution planning will be phased in and applied in a manner proportionate to a bank’s systemic importance. Such forward planning can reduce the risks posed by a D-SIB to the stability of the financial system and allow an orderly resolution of a distressed institution.

A New Framework for Liquidity Requirements

21   MAS has had a liquidity requirement long before an international standard was developed following the global financial crisis. Under MAS’ minimum liquid assets (MLA) requirement, banks must maintain eligible assets to cover a specified proportion of their qualifying liabilities. The objective is to ensure that banks have sufficient liquid assets to meet their estimated short-term cash outflows.

22   MAS last undertook a major revision of the MLA requirement in 2008. A key enhancement then was to move from a single headline MLA ratio for all banks to a more risk sensitive bank-specific MLA regime that takes into consideration the cash flow volatility and liquidity risk management capabilities of individual banks. In 2013, MAS issued a set of risk management principles to provide further guidance to banks on sound liquidity risk management practices.

23   The Liquidity Coverage Ratio (LCR) is a new international regulatory standard under the Basel III reforms. The LCR seeks to ensure that banks hold sufficient high quality liquid assets (HQLA) to match their total net cash outlfows over a 30-day period. 

24   The LCR is more risk-sensitive than the MLA. Whereas the MLA is based on balance sheet liabilites at a single point in time, the LCR calibrates liquidity requirements based on expected net outflows over a 30-day stress period. The LCR requirement takes into account the experience of banks globally during stress scenarios and better aligns regulatory requirements with the actual liquidity risks that banks may face.

25   MAS issued a public consultation in August last year on how we intend to implement the LCR framework in Singapore. MAS has considered the industry’s responses to the consultation paper as well as the implementation approaches of other reputable jurisdictions.  I will now highlight three key features of the new liquidity framework.

Foreign Banks to Maintain Liquidity Buffers

26   First, foreign banks in Singapore will continue to be subject to MAS’ liquidity requirements. Many foreign banks in Singapore operate under a universal banking model, and several also operate as funding centres for related entities in Singapore or other affiliates within their groups. While MAS recognises that there may be cost efficiencies in managing liquidity centrally at the group level, there can be significant  obstacles to the free movement of liquidity across borders during a stress scenario. Thus, foreign banks operating in Singapore will be required to maintain some liquid assets in Singapore to support their local liquidity needs.

Liquidity Buffer for Singapore Dollars and All Currencies

27   Second, the new liquidity framework will apply to all currencies. Many banks in Singapore hold a large portion of their liabilities in foreign currencies. But the current MLA requirement applies to Singapore Dollar qualifying liabilities only. Extending the liquidity requirements to all currencies recognises the need for banks to manage all their liquidity risks, whether in Singapore Dollar or foreign currency, appropriately.

28   In addition to an all-currency liquidity requirement, banks will need to meet a Singapore Dollar liquidity requirement. Apart from the local banks, many foreign banks with large domestic operations also have substantial liabilities in Singapore Dollars, including deposits. The Singapore Dollar liquidity requirement serves two purposes:

• One, it ensures that banks continue to  meet their Singapore Dollar obligations (mainly deposit liabilities) on a timely basis;
• Two, by holding a good mix of liquid assets in Singapore Dollar and other currencies against their underlying liabilities, banks are less exposed to the risk of the swap markets seizing up during periods of stress.

Two-Tier Approach

29   Third, to ensure regulatory prudence while recognising the different business models and structures of banks in Singapore, MAS will adopt a two-tier approach in applying the liquidity requirements.

30   All banks assessed by MAS to be D-SIBs will have to meet LCR requirements.

• For the local banking groups, the LCR requirements are calibrated to reflect the central management of these banking groups’ liquidity risk at the Singapore head office and are comparable to the requirements on other internationally active banks subject to the Basel LCR standard.
• For foreign banks assessed to be D-SIBs, adopting the LCR would be consistent with the implementation of the LCR standard for all internationally active banks under Basel III. Adopting a common international standard also ensures a level playing field for all banks in Singapore, and obviates the need for foreign banks subject to LCR globally to comply with a different regulatory regime in Singapore.

31   Banks that are not assessed to be D-SIBs may elect to comply with the LCR or choose to remain on MLA. As these banks may or may not be required by their home regulators to implement LCR at the group level, allowing them an option between LCR and MLA will help lower compliance costs while ensuring that these banks maintain sufficient liquid assets for their Singapore operations.

Implementation Timeline

32   The three local banking groups will be required to meet:

• A Singapore-dollar LCR of 100% by January 2015; and
• An all-currency LCR of 60% by January 2015, increasing by 10% each year to 100% by 2019. This is consistent with the Basel III implementation timeline for all internationally active banks.

33   Foreign banks on the LCR framework will be required to meet a Singapore-Dollar LCR of 100% and an all-currency LCR of 50%.  The lower all-currency requirement of 50% recognises that the head offices of many foreign banks are likely to be subject to LCR requirements as well. Banks on MLA will have to meet both the all-currency MLA and Singapore-dollar MLA at 16%. For these two groups of banks, the new requirements will start applying from January 2016. Pending that, they will continue to meet their Singapore Dollar MLA requirements.

34   MAS will be releasing further implementation details for the new liquidity rules, including the phasing in of LCR requirements, types of acceptable HQLA, cashflow assumptions, and reporting format and frequency.

35   I would like to stress that no liquidity, capital or other “point-in-time” regulatory standard can be perfectly suitable for every bank given the great diversity of their business models, risk appetites, risk management capabilities, and dynamism of their operating environment. MAS will continue to complement liquidity rules with active supervision to ensure that banks manage their liquidity in a prudent manner that is commensurate with their size and risk profiles.

Conclusion

36   Singapore’s banking sector demonstrated its resilience through the Global Financial Crisis. As you know, the IMF completed a Financial Sector Assessment Programme (FSAP) evaluation of Singapore’s financial sector last year and affirmed Singapore’s standing as a sound, stable and well-regulated financial centre. The positive assessment is a testament to MAS’ prudent regulation and supervision as well as the seriousness with which banks in Singapore take risk management in the course of their business.

37   But we must not become complacent. As an international financial centre, our banking system is exposed to many of the same risks and stresses confronted by financial institutions and jurisdictions overseas. The crisis experience shows how the buildup of risks can severely destabilise even the most developed and sophisticated financial markets. Securing the safety and robustness of our banking sector must be an ongoing process.

38   Thank you.