Published Date: 08 November 2006 Monetary Authority of Singapore
1 The Minister for Trade & Industry and Deputy Chairman of the Monetary Authority of Singapore (MAS) today moved the Banking (Amendment) Bill (the Bill) for first reading in Parliament. The Bill will be read a second time and discussed at the next available Parliamentary sitting.
Overview
2 As part of its on-going review of the banking regulatory and legislative framework, MAS is introducing several new policies and measures to strengthen prudential safeguards, facilitate risk-based supervision, provide banks with greater operational flexibility and update regulations. MAS has consulted the industry on the major policy changes and regulatory measures. A draft Bill was also released for public consultation in July 2006 and the feedback received was taken into account in finalising the Bill. The consultation papers and MAS' response to the public consultations are published on its website.
3 The enactment of the Bill will give effect to these policies and measures. The key changes in the Bill are summarised as follows:
a Strengthening Prudential Safeguards
revision of methodologies for limiting large exposures and related party exposures
introduction of an asset maintenance regime
amendment of the priority ranking of deposit liabilities of a bank
b Enhancing MAS' Role in Bank Resolution
c Facilitating Risk-Based Supervision and Allowing Operational Flexibility of Banks
enhancement to the liquidity risk supervision framework
d Expanding the Regulatory Scope for Credit Card Issuance
e Updating Regulations
lifting the statutory reserve fund requirement
qualification of the restriction on the use of the word bank
flexibility for MAS to prescribe what constitutes a deposit
revision of rules on the disclosure of information
Strengthening Prudential Safeguards
4 Several measures are proposed to strengthen the prudential safeguards for the protection of depositors.
Revision of methodologies for limiting large exposures and related party exposures
5 Currently, the Banking Act (the Act) sets prudential limits on credit facilities extended by banks to a single borrower or a group of related borrowers. It also sets limits on unsecured credit facilities to parties related to the bank. The Bill introduces a number of changes to ensure that the prudential limits remain relevant and are in line with international best practice. The first key change is to apply the limits on all exposures (including equity and off-balance sheet exposures), instead of only credit facilities, to a single counter-party or group of related counter-parties posing a single risk to the bank. The second key change is that MAS will recognise some common forms of credit risk mitigation adopted by banks.
6 To reduce the risk of contagion and non-arm's length transactions, the current limits on lending to related corporations will be widened to limit the exposures of a Singapore-incorporated bank to its substantial shareholder group(s) and exposures of a bank in Singapore to financial entities in which the bank holds a major stake. The details of the revised exposure-based limits will be set out in a Notice to be issued by MAS at a later date.
Introduction of an asset maintenance regime
7 The Bill introduces a requirement for foreign full and wholesale bank branches to maintain a minimum level of eligible assets in Singapore in proportion to their liabilities. The resolution of cross-border bank insolvencies is often complex and drawn-out, and there is usually uncertainty concerning the amount and speed of any recovery. Such a requirement would help to improve the recovery of assets from a failed foreign bank branch in Singapore to meet the claims of Singapore depositors. In line with MAS' risk-based approach to supervision, a higher asset maintenance requirement may be imposed on banks that pose greater supervisory concerns. The details of the asset maintenance regime will be set out in a Notice to be issued by MAS at a later date.
Amendment of the priority ranking of deposit liabilities of a bank
8 Presently, both non-bank and inter-bank deposit liabilities of a bank rank ahead of other unsecured liabilities of the bank 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 hence less able to exercise market discipline, the Bill will amend the Act to reorder the priority ranking placing all non-bank deposit liabilities of a bank ahead of inter-bank liabilities, with the latter ranking pari passu with other unsecured liabilities. This will be 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
9 MAS seeks to promote and preserve stability in the financial system through a high standard of supervision. However it does not aim to prevent the failure of any financial institution. Such a zero-failure regime is neither feasible nor desirable. This is consistent with the approach in many reputable jurisdictions as a zero-failure regime causes moral hazard and places an excessive regulatory burden on financial institutions. International experience has also shown that where a bank is in distress or insolvency, resolution should take place expeditiously to minimise losses to depositors and other creditors, and to maintain stability in the financial system.[1] However, compared to other regulators, MAS currently has limited powers in dealing with a distressed or insolvent bank. The Bill will accord MAS a wider role in the resolution process and a broader range of resolution options.
10 The Bill will enhance MAS' role in the insolvency proceedings of a bank, including the right to be heard in the proceedings and the power to approve the appointed liquidator. This will provide better assurance that depositors' interests will be safeguarded in the winding up of a bank.
11 The Bill also provides a wider range of resolution options by empowering MAS, with the approval of the Minister in charge of MAS (the Minister), to direct the sale of the business of a bank and, in the case of a bank incorporated in Singapore, the issuance of new shares, the restructuring of its capital or the sale of existing shares to other investors. In exercising these powers [2], MAS must be satisfied that the transfer is appropriate, having regard to the interests of depositors of both the transferor and transferee, as well as the stability of the financial system in Singapore. The Minister may also give affected parties a right to be heard before approving such a transfer, unless it is not practicable or desirable to do so, for instance if an expeditious sale or transfer is crucial to maintaining financial system stability.
Facilitating Risk-Based supervision and allowing operational flexibility of banks
12 Consistent with the risk-based supervisory approach adopted by MAS, prudential requirements should be calibrated to an individual bank's financial strength, risk profile and risk management capabilities. The Bill allows the application of such bank-specific requirements and will empower MAS to grant exemptions from requirements in the Act in specific cases.
Enhancements to the liquidity risk supervision framework
13 As part of the enhancements to the liquidity risk supervision framework, the Bill would allow the drawing down of liquidity reserves to deal with liquidity stress situations. The other changes to the framework would be set out in a Notice to be issued by MAS at a later date.
Expanding the regulatory scope for credit card issuance
14 Presently, only banks and non-bank financial institutions are subject to MAS' rules on the issuance of credit cards. The Bill extends MAS' regulatory scope to all issuers targeting the Singapore market and not just financial institutions.[3] Entities that are not approved to issue credit cards in Singapore will be prohibited from soliciting for or accepting card applications in Singapore. MAS will also be empowered to inspect the operations of approved card issuers for compliance with MAS' rules pertaining to credit card operations.
15 Single party merchant credit[4] will continue to be exempted from MAS' regulations. In addition, the Bill introduces a new exemption for cards granting credit in small amounts not exceeding S$500, allowing flexibility for companies to grant small amounts of credit without raising substantial concerns about encouraging Singaporeans to spend beyond their means.
Updating Regulations
16 In response to the developments in the banking sector, the Bill will also update and streamline several banking regulations, for which the underlying policy objectives are either no longer valid or not being met effectively. Technical amendments will also be made to clarify some provisions of the Act.
Lifting the statutory reserve fund requirement
17 The requirement for banks in Singapore to maintain a statutory reserve fund has been useful in building up banks' reserves. However, with the enhancements to the regulatory framework over the years, including revisions to MAS' capital adequacy framework for Singapore-incorporated banks and the introduction of an asset maintenance regime for foreign banks, there is no longer a need for banks to maintain a reserve fund. The Bill repeals this requirement for banks to maintain a statutory reserve fund, and allows them to release the reserves over a 5-year period.
Qualification of the restriction on the use of the word bank
18 The restriction on the use of the word bank protects consumers from being misled as to the status of the entity they are dealing with. The Bill qualifies the restriction to accommodate legitimate uses, such as (i) representative offices of foreign-licensed banks, subject to disclosure of their licensing status in home jurisdictions; (ii) financial affiliates of a bank licensed in Singapore where the word bank is used in conjunction with the related bank's name to suggest an association with it; (iii) central banks of other jurisdictions; (iv) international financial institutions as prescribed by MAS; and (v) where it is clear the word bank is not used in a financial sense (e.g. Blood Bank, Info Bank).
Flexibility for MAS to prescribe what constitutes a deposit
19 To facilitate MAS' response to product innovation, the Bill will empower MAS to exclude or include any financial product from or in the definition of deposit. This is intended to cater to 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 product, an Islamic variant of a time deposit, where the amount placed by the customer with the bank arises from an underlying sale and purchase transaction of assets in compliance with Shariah principles.
Revision of rules on the disclosure of information
20 The Bill qualifies the restriction on MAS' disclosure of information furnished by banks, to allow disclosure of only non-customer information under limited circumstances such as sharing of aggregate unpublished information at international fora and contributing to research projects. The revised rules on information disclosure balance MAS' responsibility for surveillance and supervision of the financial sector with its obligation to preserve the confidentiality of individual banks' information.
MAS' responses to the feedback on the consultation paper is available on the MAS website. [Click here to view MAS' responses (210.2 KB) ].
The Banking (Amendment) Bill is available on the Parliament of Singapore website. [Click here to view the Banking (Amendment) Bill]
1 In dealing with a distressed or insolvent bank, there are various bank resolution options apart from a winding-up. A private sector resolution option is often preferred by regulators internationally, for instance, via recapitalisation of the bank by existing or new shareholders, or acquisition of the business of the distressed or insolvent bank by another bank. However, in the event that a private sector solution is not possible, it may be necessary for the regulator to be able to take action to resolve the distressed or insolvent bank quickly and safeguard the interests of depositors and maintain the stability of the financial system.
2 The grounds for exercising these powers are, where (a) the bank informs MAS that it is, or is likely to become, insolvent or unable to meet its obligations or that it has suspended or is about to suspend payments; (b) the bank becomes unable to meet its obligations, or is insolvent, or suspends payments; (c) MAS is of the opinion that the bank (i) is carrying on business in a manner likely to be detrimental to the interests of its depositors or creditors; (ii) is, or is likely to become, insolvent or unable to meet its obligations, or that it is about to suspend payments; (iii) has contravened any of the provisions of the Act; or (iv) has failed to comply with any condition attached to its licence; or (d) MAS considers it to be in the public interest to do so.
3 Separately, MAS and the Ministry of Law have proposed a consistent regulatory regime for unsecured personal credits granted by financial institutions and moneylenders. A public consultation was held and the feedback would be considered in finalising the changes.
4 In the case of single party merchant credit, the card is used only for transactions with the issuer, who is the sole party bearing the credit risks of the cardholders.