Introduction

The Monetary Authority of Singapore (MAS) issued a consultation paper in June 2014 which sets out proposals for a framework to identify domestic systemically important banks (D-SIBs) in Singapore and to address the risks that they pose, including an outline of the methodology to be used to assess the systemic importance of banks and the policy measures that may apply to D-SIBs.

This step has been taken in response to publication by the Basel Committee on Banking Supervision (BCBS) in November 2011 of a framework for assessing global systemically important banks (G-SIBs). To complement the G-SIB framework and to address similar risks posed by D-SIBs at the national level, national authorities are expected to develop and implement their own D-SIB frameworks to identify and adopt appropriate measures to address the risks posed by systemically important banks in their domestic financial systems by 1 January 2016.

Assessment Methodology

The banks designated as D-SIBs in Singapore are broadly classified into 3 categories: locally incorporated bank groups, foreign bank groups and foreign bank branches.

MAS proposes to adopt an indicator-based approach to assess the systemic importance of banks based on four factors: size, interconnectedness, substitutability and complexity. The D-SIB assessment should not be applied mechanistically but should involve the exercise of supervisory judgment and take into consideration other supplementary information where relevant.

Size

Size is a key measure of system importance. The larger the bank and its share of domestic activity, the more likely it is that its failure or distress will negatively impact the domestic economy and financial markets. MAS proposes to measure the size of a bank on the basis of a bank’s share of banking system assets or share of total non-bank deposits. MAS further proposes to identify banks with a significant retail presence through their share of resident non-bank deposits and number of depositors with accounts less than or equal to S$250,000.

Interconnectedness

As financial institutions operate in a network of contractual obligations, financial distress at one financial institution raises the likelihood of distress at other financial institutions due to spill over effects. As such, banks which have large and numerous direct and indirect linkages within a financial system are systemically important. MAS proposes to assess the interconnectedness of a bank within the domestic financial system by way of a network analysis of the interbank system. As banks which are large interbank borrower and lenders may not be captured by the network analysis, MAS further proposes to rely on a bank’s share of amount due to banks and share of amount due from banks to identify such large interbank players.

Substitutability

The larger the role that a bank plays as a market participant and/or service provider, the greater the potential for widespread disruption if that bank’s services were to be disrupted and the more difficult and costly it is likely to be to find a substitute bank that can provide the same services in a timely manner. Banks which provide such key specialised services or infrastructure services are therefore systemically important. MAS proposes to identify such banks through the following indicators: share of New MAS Electronic Payment System payments, share of assets under custody, share of values of underwritten transactions in debt and equity markets and whether a bank is a USD cheque settlement bank. These indicators reflect the functions and activities that are vital to the effective functioning of Singapore’s financial system and broader domestic economy.

Complexity

A bank’s systemic importance can be enhanced by the complexity of its business, structure and operations. A complex bank facing distress could potentially generate larger spill over effects due to the greater time and resources required to resolve any issues that may arise. MAS proposes to assess the complexity of a bank through a combination of quantitative and qualitative factors. The complexity of a bank can be assessed quantitatively by considering a bank’s share of gross OTC derivatives outstanding as a bank is more complex when a large part of its derivatives outstanding is not cleared through a central counter party. The complexity of a bank can be assessed qualitatively based on factors such as the role of the bank in the whole bank group and domestic financial system, number of jurisdictions in which the bank operates, number of business units through which the bank operates and whether the bank has centralised or decentralised capital and liquidity management.

Notwithstanding the above, MAS considers that complexity as a factor on its own is unlikely to accord systemic importance to a bank unless the bank is also significant in size, interconnectedness or substitutability.

Policy Measures

MAS proposes that each category of D-SIB should be subject to appropriate policy measures as summarized below.

Higher Loss Absorbency (HLA) requirement

The application of HLA requirements to D-SIBs aims to reduce the probability of their failure by increasing their going-concern capital buffers. The minimum capital requirements imposed on D-SIBS will be 2% points higher than the minimum capital requirements imposed by the BCBS.

Liquidity Coverage Ratio (LCR) requirement

Locally incorporated bank groups are required to meet a Singapore dollar LCR requirement of 100% and an all currency LCR requirement of 60% by 1 January 2015. The all-currency LCR requirement will increase by 10% points each year to reach 100% by 2019.

Foreign bank groups and branches which are designated as D-SIBs will be required to meet a Singapore dollar LCR requirement of 100% and an all currency LCR requirement of 50% by 1 January 2016.

Recovery and Resolution Planning

MAS proposes to require D-SIBs to undertake recovery and resolution planning to reduce the risks posed by D-SIBs to the stability of the financial system, ensure the continuity of functions critical to the economy and allow a D-SIB in distress to be restructured or exit from the market in an orderly manner.

Enhanced / Additional Disclosure

In particular, MAS proposes to impose additional disclosure requirements on foreign bank branches designated as D-SIBS, in order to enhance market discipline through increased transparency and disclosure of risks associated with D-SIB branches and to allow for early intervention by MAS and the market if necessary.

Effective Risk Data Aggregation and Risk Reporting

MAS expects all D-SIBs to comply with risk principles and implement effective risk data aggregation and risk report practices within 3 years of their designation as D-SIBs.

Local Incorporation Requirements

MAS proposes that local incorporation requirements be imposed in respect of systemically important foreign bank branches with a significant retail presence in Singapore. MAS will apply this requirement to all full banks in Singapore as they are able to access the retail market. As such, any full bank designated as a D-SIB by virtue of its significant retail presence will be required to incorporate its retail operations locally.

Implementation Timeline

MAS proposes to publish the initial list of D-SIBs by the first quarter of 2015 based on end-2013 data to provide banks with sufficient time to comply with policy measures. Thereafter, MAS proposes to publish the list of D-SIBS annually after each D-SIB assessment exercise.