Banking regulation in Singapore
i Relationship with the prudential regulator
Banks are regulated and supervised by MAS. As a regulator, MAS aims to be business-friendly, adopting a consultative approach in developing regulations, typically through public consultation processes. MAS adopts risk-based supervision with the objective of fostering the safety and soundness of banks, and with promoting transparency and fair dealing in banks in relation to their customers and counterparties.
Under the risk-based approach, MAS employs the impact and risk model, which aims to reduce the risk and impact of the failure of banks or of inappropriate behaviour through increased supervision where it is appropriate and likely to be effective. The impact and risk model entails MAS evaluating and rating the impact and risk of a bank relative to other institutions. On combining the assessments of both impact and risk ratings, MAS is able to distinguish those banks that may pose a greater threat to the safety and soundness of the sector, and accordingly determine the level and intensity of supervision required.
MAS performs its supervisory responsibilities by checking on the quality of corporate governance, internal controls and risk management of the bank, and its dealings with its customers and counterparties. In this way, MAS hopes to encourage a system of sound management practices commensurate with the bank's type, scale and complexity of business activities, and their related risks.
MAS also reinforces the responsibilities of the board and senior management for the oversight and governance of the bank's activities and risk management and internal processes. As long as risks are adequately managed, MAS seeks to minimise the need to interfere with a bank's business operations.
ii Management of Singapore-incorporated banks
MAS places considerable emphasis on good governance and the quality of directors of Singapore-incorporated banks.
MAS' Guidelines on Corporate Governance for Financial Holding Companies, Banks, Direct Insurers, Reinsurers and Captive Insurers which are Incorporated in Singapore (Guidelines) comprise the Code of Corporate Governance 2012 for companies listed on the Singapore Exchange Securities Trading Limited (SGX-ST) and supplementary principles and guidelines from MAS. The Guidelines and the Banking (Corporate Governance) Regulations 2005 define what is meant by an independent director, and set out the requirements for the composition of the board of directors and board committees, such as the nominating committee, remuneration committee, audit committee and risk management committee. The Guidelines also set out, inter alia, the principle that there should be a clear division of responsibilities between the leadership of the board of directors of a bank and the executives responsible for managing a bank's business, as well as the principle that there should be a strong and independent element on the board of directors of a bank that is able to exercise objective judgement on corporate affairs independently, in particular, from the management of the bank and 10 per cent shareholders of the bank (as defined in the Guidelines). The Guidelines also encourage the separation of the roles of chair and chief executive officer and outline how this is to be applied. The Guidelines further set out the principle that the board of directors of a bank should ensure that the bank's related-party transactions are undertaken on an arm's-length basis.
Inter alia, the remuneration committee of a bank reviews and recommends to a bank's board of directors a general framework of remuneration for the board of directors and key management personnel. Recommendations are also made regarding remuneration packages for each director and key management personnel.
While there are no restrictions on bonus payments to management and employees of a bank, a Singapore-incorporated bank is required to adopt the Principles for Sound Compensation Practices and Implementation Standards issued by Financial Stability Board (FSB), which are intended to reduce incentives towards excessive risk taking that may arise from the structure of compensation schemes.
Separately, MAS Notice 637 on Risk-Based Capital Adequacy Requirements for Banks Incorporated in Singapore (MAS Notice 637) stipulates that the board of directors and senior management of a Singapore-incorporated bank are responsible for mitigating the risks arising from remuneration policies. In this regard, the compensation practices and policies of the Singapore-incorporated bank must not be unduly linked to short-term accounting profit generation. Instead, they should be linked to longer-term capital preservation and the financial strength of the bank.
iii Regulatory capital and liquidityMinimum capital requirements
The Banking Act prescribes minimum capital requirements for banks. Save where approved by MAS for wholesale banks, the minimum capital requirement for a Singapore-incorporated bank is S$1.5 billion.
MAS Notice 637 implements Basel III capital standards for Singapore-incorporated banks, and establishes the minimum capital adequacy ratios (CARs) for banks incorporated in Singapore and the methodology for calculating these ratios. MAS Notice 637 also sets out the expectations of MAS in respect of the internal capital adequacy assessment process of Singapore-incorporated banks under the supervisory review process, and specifies the minimum disclosure requirements for Singapore-incorporated banks in relation to their capital adequacy. MAS Notice 637 further sets out the data submission and disclosure requirements for assessing global systemically important banks.
MAS has imposed CAR requirements on a bank incorporated in Singapore at two levels:
- the bank standalone (solo) level CAR requirements, which measure the capital adequacy of a bank incorporated in Singapore based on its standalone capital strength and risk profile; and
- the consolidated (group) level CAR requirements, which measure the capital adequacy of a bank incorporated in Singapore based on its capital strength and risk profile after consolidating the assets and liabilities of its subsidiaries and any other entities that are treated as part of the bank's group of entities according to the applicable accounting standards (collectively called bank group entities), taking into account any exclusions of certain bank group entities or any adjustments pursuant to securitisation under MAS Notice 637.
In addition to complying with the CAR requirements in MAS Notice 637, a bank incorporated in Singapore should consider as part of its internal capital adequacy assessment process whether it has adequate capital at both the solo and group levels to cover its exposure to all risks.
Under MAS Notice 637, banks incorporated in Singapore that are designated by MAS as domestic systemically important banks (D-SIBs) are required to meet capital adequacy requirements that are two percentage points higher than the requirements of the Basel Committee on Banking Supervision (Basel Committee), namely a minimum Common Equity Tier 1 CAR of 6.5 per cent, a minimum Tier 1 CAR of 8 per cent and a minimum total CAR of 10 per cent. Other Singapore-incorporated banks are only required to maintain the minimum ratio in accordance with the Basel Committee's requirements.
In line with the Basel Committee's requirements, MAS introduced in MAS Notice 637 a capital conservation buffer of 2.5 per cent above the minimum capital adequacy requirements. The capital conservation buffer is met with CET 1 capital, and is currently 2.5 per cent. Including the capital conservation buffer, banks incorporated in Singapore that are designated by MAS as D-SIBs will be required to meet CET 1, Tier 1 and total CARs of 9, 10.5 and 12.5 per cent, respectively.
In addition, Singapore-incorporated banks are required to maintain a countercyclical buffer, which was phased in on 1 January 2016 and progressively increased until 2019. From 1 January 2019, the countercyclical buffer will range from zero to 2.5 per cent above the minimum CET 1, Tier 1 and total CARs, the actual magnitude being determined by the weighted average of the country-specific countercyclical buffer requirements that are being applied by national authorities in jurisdictions in which a Singapore-incorporated bank has private-sector credit exposures.
Under MAS Notice 637, Singapore-incorporated banks are also required to maintain at all times a minimum leverage ratio of 3 per cent, to be met with Tier 1 capital. This is consistent with the Basel standard and applies at both bank-group and bank-solo levels.
A bank is required to hold minimum liquid assets (MLA) as specified in Section 38 of the Banking Act and in accordance with the requirements under MAS Notice 649 on Minimum Liquid Assets and Liquidity Coverage Ratio (LCR) (MAS Notice 649).
Banks incorporated and headquartered in Singapore and banks notified by MAS to be D-SIBs must comply with the LCR framework under MAS Notice 649. Other banks in Singapore may elect to comply with either the MLA framework or the LCR framework.
The LCR framework implements the Basel III LCR rules, which are the global minimum standard for liquidity risk endorsed by the Group of Central Bank Governors and Heads of Supervision, and which require banks to hold sufficient high-quality liquid assets to match their total net cash outflows over a 30-day period. Banks in Singapore under the LCR framework must maintain at all times a Singapore dollar LCR of at least 100 per cent. Banks incorporated and headquartered in Singapore must maintain at all times an all currency LCR of 100 per cent. All other banks under the LCR framework must maintain at all times an all currency LCR of 50 per cent.
Banks in Singapore under the MLA framework must hold at all times a minimum of 16 per cent of its qualifying liabilities (as defined in MAS Notice 649) denominated in all currencies in liquid assets denominated in any currency, and a minimum of 16 per cent of its Singapore dollar qualifying liabilities in Singapore dollar liquid assets. A bank in Singapore under the MLA framework must also hold at all times at least 50 per cent of its liquid assets held for the purposes of meeting its MLA requirements in Tier 1 liquid assets.
In addition, MAS imposes the Basel Committee's net stable funding ratio (NSFR) standard on banks designated by MAS to be D-SIBs. The NSFR requires banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. Under MAS Notice 652 on Net Stable Funding Ratio (MAS Notice 652), D-SIBs incorporated and headquartered in Singapore are required to maintain an all currency NSFR of at least 100 per cent on an ongoing basis, at a banking group level, after excluding certain banking group entities. D-SIBS headquartered offshore are required to meet a minimum NSFR of 50 per cent at the entity level or at the country-level group basis (where approval has been obtained from MAS to comply on a country-level group basis).
Separately, under Section 39 of the Banking Act and MAS Notice 758 on Minimum Cash Balance (MAS Notice 758), a bank in Singapore is also required to maintain, during a maintenance period, an aggregate minimum cash balance with MAS of at least an average of 3 per cent of its average qualifying liabilities (as defined in MAS Notice 758).
iv Recovery and resolution
Like any other company, the legislative framework for the insolvency of banks is found in the Companies Act. In addition, MAS has special powers over banks as set out in the Banking Act and the MAS Act. These special powers are designed for the protection of depositors in certain events, including where a bank becomes insolvent, is unable to meet its obligations, is going to suspend payments or is carrying on its business in a manner likely to be detrimental to the interests of its depositors or creditors. In these situations, under the Banking Act, MAS may require the bank concerned to take any action or refrain from doing an act. MAS may also appoint a statutory adviser to advise the bank on the proper management of its business. MAS may itself assume control of and manage the business of the bank, or appoint a statutory manager to do so.
Where a bank is incorporated outside Singapore, the advice given by the statutory adviser or control assumed by MAS or the statutory manager over the bank's business will only relate to the business or affairs of the bank carried on or managed in or from Singapore, or the property of the bank located in Singapore or reflected in the books of the bank in Singapore in relation to its operations in Singapore.
MAS also has broad supervisory powers under the resolution regime in the MAS Act. Apart from the provisions in the Companies Act, the MAS Act provides for additional grounds for the winding up of a bank. MAS may apply to the court for an order to claw back the salary, remuneration or other benefits of a director or executive officer in the past two years in certain circumstances, including where the director or executive officer has failed to discharge his or her duties, or has misapplied or retained, or become liable or accountable for, any money or property of a bank. The clawback period may be extended if the director or executive officer has acted recklessly, fraudulently or dishonestly. MAS is further vested with the power to issue directions to a bank's significant associated entities that are incorporated or established in Singapore under certain circumstances, as well as to share information with a foreign resolution authority if the information is intended to enable such authority to deal with the resolution of a financial institution.
The MAS Act also empowers MAS to direct the compulsory transfer of business of the bank, and in the case of a bank incorporated in Singapore, MAS further has the power to direct compulsory transfers of shares or compulsory restructuring of the share capital of the bank upon certain preconditions being satisfied.
There is currently no formalised bail-out regime in Singapore.
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