1.       Introduction

The Monetary Authority of Singapore (“MAS”) has issued a consultation paper on 31 August 2015 proposing to remove the requirement for banks in Singapore to maintain two separate accounting units – the Domestic Banking Unit (“DBU”) and the Asian  Currency  Unit  (“ACU”).  This  development  follows  from  the  announcement  made  by Shanmugaratnam on 30 June 2015 during the Annual Dinner of the Association of Banks in Singapore.  MAS  Chairman  Tharman Shanmugaratnam on 30 June 2015 during the Annual Dinner of the Association of Banks in Singapore.

Presently, all banks in Singapore are required to maintain a DBU and an ACU. Transactions in Singapore dollars can be booked only in the DBU whereas transactions in foreign currency are typically booked in the ACU. The DBU-ACU divide and the regulatory framework built around this have been in place since the Asian Dollar Market was created in 1968 and they have served the Singapore banking market very well. This framework has ensured that domestic financial stability is safeguarded by allowing additional prudential requirements to be imposed on bank’s domestic businesses in Singapore, while at the same time, avoiding undue restrictions on the offshore activities of banks in Singapore. However, with recent international developments as well as changes to the development strategies of the MAS, it is now no longer important to distinguish between the offshore and onshore banking activities of a bank and therefore, to maintain the DBU-ACU divide.

The  present  consultation  paper  addresses  the  various  changes  that  would  need  to  be  made  to  the  banking  regulatory framework following the abolition of the DBU-ACU divide.

2.       Proposed Amendments to Regulations

In line with the proposed removal of the DBU-ACU divide, MAS has proposed various consequential amendments to references to the DBU-ACU divide in the Banking Act (“BA”) and other regulatory provisions. MAS has also said that it will work separately with the banking industry on proposed amendments to regulatory returns that were previously based on the DBU-ACU divide.

The key regulatory provisions that currently refer to the DBU-ACU divide are as follows:

  1. Priority of specified liabilities in insolvency (section 62(1) of the BA);
  2. Asset maintenance requirements (MAS Notice 640);
  3. Anti-commingling limits (regulations 23F and 23G of the Banking Regulations);
  4. Equity investments limit (section 31 of the BA) and immovable propert
  5. Concentration limits (MAS Notice 639).

The specific MAS proposals for each are as follows:

I. Priority of specified liabilities in insolvency

Currently, in the event of winding up, the liabilities of a bank in Singapore are ranked under section 62(1) of the BA as follows:

  1. Premium contributions due and payable by the bank under the Deposit Insurance and Policy Owners’ Protection Schemes Act 2011 (“DI Premiums”);
  2. Liabilities incurred by the bank in respect of insured deposits, up to the amount of compensation paid or payable out of the Deposit Insurance Fund by the Agency under the Deposit Insurance and Policy Owners’ Protection Schemes Act 2011 in respect of such insured deposits ( "Insured Deposits”);
  3. Deposit liabilities incurred by the bank with non-bank customers other than those specified in paragraphs (ii) and (iv) (i.e. “uninsured non-bank deposits in the DBU" ); and
  4. Deposit liabilities incurred by the bank with non- -bank customers when operating an ACU (i.e. "uninsured non-bank deposits in the ACU”).

MAS has proposed to amend section 62(1) of the BA (including consequential amendments to regulations 29 and 30 of the Banking Regulations) to rank uninsured non-bank deposits in insolvency by the currency denomination of the deposits as follows:

  1. DI Premiums;
  2. Insured Deposits;
  3. Uninsured Singapore dollar non-bank deposits; and 
  4. Uninsured foreign currency non-bank deposits.

II.             Asset maintenance requirements

MAS has also proposed to amend the minimum asset maintenance requirements set out in MAS Notice 640 on Minimum Asset Maintenance Requirements, in alignment with the proposed priority ranking of specified liabilities above. Under the proposed amendments, asset maintenance requirements will be applied by currency denomination rather than the amount of DBU non- bank deposits held by a bank. As such, current asset maintenance ratios for DBU non-bank deposits will be applied on Singapore dollar non-bank deposits instead.

MAS has further added that the list of eligible assets will remain unchanged, since they are currently selected based on factors that are independent of the DBU-ACU divide (i.e. quality and recoverability).

III.            Anti-commingling limits

Banks are presently required under regulations 23F and 23G of the Banking Regulations to comply with anti-commingling limits on their capital funds (“capital funds” is in turn defined based on the DBU-ACU divide). MAS has proposed to remove the concept of capital funds for banks incorporated outside Singapore and revise the methodology for computing the anti- commingling limits, while at the same time retaining the regulatory policy on anti-commingling.

The proposed revised limits will be based on total assets instead of capital funds and are calibrated at lower absolute levels than the existing limits, given that banks’ total assets are typically significantly larger than their capital funds. Under the proposed revised limits:

  1. The total net book value of a bank’s prescribed private equity or venture capital business under regulation 23F of the Banking Regulations cannot exceed 2% of its total assets in Singapore; and
  2. The aggregate size of a bank’s prescribed related or complementary business  under regulation 23G of the Banking Regulations cannot exceed 2% of its total assets in Singapore.

Where a bank carries on business under both regulations 23F and 23G, MAS has proposed that the bank be required to limit the aggregate size of all such businesses to 4% of its total assets in Singapore.

Consequential amendments to regulations 23F and 23G of the Banking Regulations, MAS Notice 601 on Capital funds, Net Head Office Funds and Head Office Capital Funds, as well as consequential amendments to MAS Notice 630 on Private Equity and Venture Capital Investments and the MAS Guidelines on Banking Regulations 23F and 7A, will be effected to implement the above proposal.

IV.           Equity investment limit and immovable property limit

Currently, sections 31 and 33 of the BA impose limits on a bank’s equity investments and immovable property. MAS Notice 625 on Compliance with Sections 31 and 33 on a Consolidated Basis requires that these limits be applied on a consolidated basis. MAS has proposed to remove such limits, on equity investments and immovable property, for banks incorporated outside Singapore. All banks will still be required, however, to report their equity investments and interests in, or rights over, immovable property as required under MAS Notice 609 on Auditors’ Reports and Additional Information to be Submitted with Annual Accounts.

Notwithstanding the above, MAS will retain the discretion to impose such limits for an individual bank or a class of banks incorporated outside Singapore for supervisory or prudential reasons. The  appropriateness of setting a limit on a bank’s interests in, or rights over, immovable property in Singapore will also be separately reviewed by MAS.

V.          Concentration limits

Currently, MAS Notice 639 on Exposures to Single Counterparty Groups sets out various concentration limits for banks such as large exposure limits, substantial exposures limits and limits for investments in index or investment funds. MAS has considered that, in view of the common supervisory framework set up by Basel Committee on Banking Supervision for controlling large exposures by banks to a single party, it may leverage on the home regulators to monitor and control such risks at the bank group level, thereby obviating the need for additional limits to be imposed by the MAS on banks incorporated outside Singapore. MAS has thus proposed to remove such limits under MAS Notice 639 for banks incorporated outside Singapore.

The limits will however continue to apply in respect of banks incorporated in Singapore.

MAS has also proposed to remove the limits on unsecured credit facilities to director groups, under MAS Notice 639, for all banks, adopting the view that such risks of conflicts of interest would be better managed through sound processes and risk management controls.

Lastly, MAS has proposed that MAS Notice 639A on Exposures and Credit Facilities to Related Persons be amended to remove the requirement for banks to submit separate statements for DBU and ACU operations. Banks may henceforth submit a single statement instead.

3.        Implementation Timeline

MAS proposes to give all banks an implementation period of two years, from the time MAS issues the revised regulatory requirements, to implement the proposed changes.

4.        Consultation Period

The consultation period ends on 30 September 2015.