Jurisdiction - Singapore
Reports and Analysis
Singapore – MAS Proposes New Framework For Domestic Systemically Important Banks.

10 July, 2014

 

 

Introduction

 

In a speech delivered by Monetary Authority of Singapore (“MAS”) Deputy Chairman Mr Lim Hng Kiang at the Annual Dinner of the Association of Banks of Singapore (“ABS”) on 24 June 2014, and in a Consultation Paper released the following day, the MAS has announced significant new measures to strengthen the resilience of the Singapore banking system.


New Policy For Domestic Systemically Important Banks

 

In light of the public bail-out of large, global systemically important financial institutions (“FIs”), the Basel Committee on Banking Supervision (“BCBS”) published in November 2011 a framework for assessing global systemically important banks (“G-SIBs”). To complement the G-SIB framework and to address similar negative externalities on a national level, MAS has in the Consultation Paper proposed a broadly parallel framework for Domestic Systemically Important Banks (“D-SIBs”).

 

Proposed Framework/Assessment

 

MAS proposes to adopt an indicator-based approach to assess banks’ systemic importance. The proposed indicators will be
based on the following four factors:

 

(a) Size

(b) Interconnectedness
(c) Substitutability
(d) Complexity

Size

Size is a key measure of systemic importance. The larger a bank and its share of domestic activity, the higher the likelihood that its failure or distress will negatively affect the domestic economy and financial markets. In assessing size, MAS will look at how much of a share the bank has in assets held within the Singapore banking systems as well as the bank’s share of total non-bank deposits in Singapore.

 

Interconnectedness

 

FIs operate in a network of contractual obligations wherein financial distress at one institution can generate spill over effects and raise the likelihood of distress at other institutions. Banks which have large and numerous direct and indirect linkages within a financial system are hence systemically important. Interconnectedness will be assessed by looking at a particular bank’s position within the interbank network, as well as the amount which that bank owes to other banks and the amount which other banks owe to that bank.

 

Substitutability

The larger the role a bank plays as a market participant and/or service provider, the greater the potential for widespread disruption if the bank’s services were to be interrupted. Finding a substitute bank that can provide the same service in a timely manner will also be more difficult and potentially costly. Substitutability will be assessed by looking at the bank’s level of participation or share in the MEPS+ payment system, as well as the bank’s share of assets under custody, share of underwritten transactions in the debt and equity markets and also whether the bank is a USD cheque settlement bank.

 

Complexity

 

MAS proposes to assess banks’ complexity quantitatively and qualitatively. On the quantitative side, MAS proposes to use “share of gross OTC derivatives outstanding” as a yardstick, as it becomes more difficult to resolve a bank when a large portion of its derivatives outstanding is not cleared through a central counterparty. On the qualitative side, MAS proposes to take into account a variety of factors, including the role of the bank within the banking group and within the domestic financial system, the number of jurisdictions in which the bank operates, the number of business units which the bank operates and the nature of the bank’s capital and liquidity management functions (particularly whether such functions are centralised or decentralised)

 

Assessment

 

MAS will consider a bank’s complexity in the context of its size, interconnectedness, substitutability when assessing its systemic
importance.

 

Implications Of Being D-SIB

 

There would be 3 categories of D-SIBs:

 

(a) Locally-incorporated bank groups
(b) Foreign bank groups, comprising locally incorporated banks and sister branches
(c) Foreign bank branches
Each type of D-SIB will be subject to the following measures (as appropriate):

 

(a) Higher Loss Absorbency (“HLA”)
(b) Local incorporation requirement (for foreign bank branches)
(c) Liquidity Coverage Ratio (“LCR”)
(d) Recovery and resolution planning
(e) Enhanced disclosure
(f) Effective risk data aggregation and risk reporting

HLA Requirement

 

The application of the HLA requirement to D-SIBs aims to reduce the probability of their failure by increasing their going-concern
capital buffers. D-SIBs will be required to hold a minimum capital requirement of 2% higher than that imposed by BCBS.

 

Local Incorporation Requirement

MAS proposes that this requirement apply to systemically important foreign bank branches that have a significant retail
presence in Singapore. It already applies to all full banks in Singapore.

 

LCR Requirement

 

The policy on LCR implementation was announced by MAS Deputy Chairman Mr Lim in his speech at the ABS Annual Dinner. MAS has long maintained a minimum liquid asset (“MLA”) requirement for banks, designed to ensure that banks maintain sufficient liquid assets to meet their estimated short-term cash flows. The MLA measure is founded on banks having to maintain eligible assets covering a specified proportion of their qualifying liabilities. The new LCR requirement emanating from the BCBS adopts a different approach in requiring banks to hold sufficient high quality qualifying assets to match their total net cash outflows over a 30-day period. Having previously consulted on domestic implementation of the LCR requirement, MAS would be implementing the LCR requirements in the following manner.

 

Foreign banks will continue to be subject to liquidity buffer requirements. These requirements will be extended to all currencies so that banks will need to maintain an all currency liquidity buffer as well as a Singapore dollar liquidity buffer.

 

In terms of which liquidity buffer would apply, banks assessed by MAS to be D-SIBs will have to meet the new LCR requirements. For the local banking groups, the LCR requirement will be calibrated to reflect the fact that liquidity will be centrally managed from the Singapore head office. For foreign banks assessed as D-SIBs, the LCR standard would be consistent with BCBS standards for internationally active banks. Banks which are not assessed to be D-SIBs may elect to comply with the LCR or choose to remain subject only to the MLA requirements.

 

The new requirements will come into effect in stages:

 

  • For the local banking groups, by 1 January 2015, MAS will require them to meet a Singapore dollar LCR of 100% and an all currency LCR requirement of initially 60%. The all-currency LCR for local banking groups will increase by 10% each year to reach 100% by 2019. 
  • For foreign banks assessed to be D-SIBs, by 1 January 2016, MAS will require them to meet a Singapore dollar LCR of 100% and an all-currency LCR requirement of 50%.
  • For banks on the MLA requirement, from 1 January 2016, MAS will require them to meet a Singapore dollar MLA requirement and an all-currency MLA both fixed at 16%.

 

Recovery And Resolution Planning

 

MAS proposes to require D-SIBs to undertake recovery and resolution planning. This involves preparation and submission of recovery plans and to provide information relevant to the preparation of resolution plans.

 

Enhanced Disclosure

 

MAS proposes to apply additional disclosure requirements to foreign bank branches that are designated as D-SIBs. The proposal seeks to enhance market discipline through the promotion of transparency and disclosure risks associated with the operation of the D-SIB branches.

 

Effective Risk Data Aggregation And Risk Reporting

 

MAS expects all D-SIBs to comply with the BCBS principles for effective risk data aggregation and risk reporting, and to implement effective risk data aggregation and risk reporting practices within three years of being designated as D-SIBs.

 

Implementation Timeline

 

MAS proposes to publish the initial list of D-SIBs, by first quarter 2015 to provide banks with sufficient time to comply with relevant D-SIB policy measures. Thereafter, MAS proposes to publish the list of D-SIBs annually after each D-SIB assessment exercise.

 

The MAS consultation is open for public feedback until 25 July 2014.

 

Shook Lin Bok LLP

 

For further information, please contact:

 

Eric Chan, Partner, Shook Lin & Bok
eric.chan@shooklin.com

 

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