On 17 October 2014, the Monetary Authority of Singapore (the “MAS”) issued a consultation paper on proposed amendments to MAS Notice 1111 on Risk Based Capital Adequacy Requirements for Merchant Banks Incorporated in Singapore (“MAS Notice 1111”).

The proposed amendments to MAS Notice 1111 incorporate key elements of the Basel III capital standards as set out by the Basel Committee on Banking Supervision and aim to strength the capital framework for merchant banks. The amended MAS Notice 1111 would include the statement that a merchant bank shall refer to publications issued by the Basel Committee on Banking Supervision providing interpretative guidance on the Basel capital framework.

The following are the key amendments proposed to be made to MAS Notice 1111.

Minimum capital adequacy ratio (“CAR”) requirements

The MAS proposes to require Singapore-incorporated merchant banks (hereinafter referred to as “merchant banks”) to maintain a minimum Common Equity Tier 1 (“CET1”) CAR of 4.5%. This would be in addition to the existing requirements of a minimum Tier 1 CAR of 6% and a minimum total CAR of 8%.

Capital buffer requirements

The MAS proposes to require merchant banks to maintain additional amounts of CET1 capital in the form of a Capital Conservation Buffer, to be phased in starting from 0.625% of risk-weighted assets (“RWAs”) in 2016 and reaching 2.5% of RWAs in 2019. The aim of this proposal is the promotion of conservation of capital and the build-up of adequate buffers above the minimum that can be drawn down in periods of stress. The MAS also proposes to introduce requirements on the Countercyclical Buffer for merchant banks. The Countercyclical Buffer, which may be applied in periods of excess credit growth, would range between zero and 2.5% of RWAs and be phased in between 2016 and 2019.

Definition of capital

To raise the quality of their regulatory capital base, the MAS proposes to enhance the definition of “capital” of merchant banks with the proposed inclusion of definitions for “CET1 Capital”, “CET1 capital instrument”, “CET1 CAR”, “Additional Tier 1 Capital” and “Additional Tier 1 capital instrument”.

Supervisory reporting of the leverage ratio

The MAS proposes to require reporting of the leverage ratio by merchant banks to the MAS. The MAS will align the definition of leverage ratio with that in the Basel capital framework.

Counterparty credit risk

The MAS proposes to require merchant banks to maintain capital for credit valuation adjustment risk arising from derivative transactions. In relation to merchant banks, “credit valuation adjustment”means an adjustment to the mid-market valuation of the portfolio of trades with a counterparty, which reflects the market value of credit risk, and may include either the market value of the credit risk of the counterparty or the market value of the credit risk of both the merchant bank and the counterparty.

Consultation period and implementation

The consultation period closes on 17 December 2014. The MAS intends to provide merchant banks a period of 12 months from the date of the issuance of the finalised capital adequacy rules to comply with the revised requirements.

Reference material

The consultation paper is available from the MAS website www.mas.gov.sg by clicking here.