On 14 September 2012, the Monetary Authority of Singapore (the“MAS”) issued a revised MAS Notice 637 on Risk Based Capital Adequacy Requirements for Banks Incorporated in Singapore (“MAS Notice 637”) to raise the quality of the regulatory capital base, enhance risk coverage of the capital framework, and introduce the new leverage ratio and capital buffer requirements, as well as other amendments arising from the policy review of the MAS.
MAS Notice 637 establishes the minimum capital adequacy ratios (“CAR”) for banks incorporated in Singapore and the methodology to be used for calculating these ratios.
MAS Notice 637 takes effect on 14 September 2012. MAS Notice 637 dated 14 December 2007 has been cancelled with effect from 14 September 2012. However, a bank incorporated in Singapore does not need to comply with the requirements set out in MAS Notice 637 until 1 January 2013, other than the requirements set out in paragraphs 6.5.7 and 6.5.8, which a bank incorporated in Singapore has to comply with effective from 14 September 2012. A bank incorporated in Singapore shall continue to comply with the requirements set out in the cancelled MAS Notice 637 dated 14 December 2007 until 31 December 2012.
The requirements in paragraphs 6.5.7 and 6.5.8 provide that capital instruments issued between 14 September 2012 and 31 December 2012 (both dates inclusive) that meet certain specified requirements shall be deemed to be a Tier 1 or Lower Tier 2 capital instrument, as the case may be, under the relevant provisions in the cancelled MAS Notice 637 dated 14 December 2007.
In December 2011, the MAS issued a consultation paper on “Proposed Amendments to MAS Notice 637 to Implement Basel III Capital Standards in Singapore” (the “Consultation Paper”). The Consultation Paper invited comments on the proposed amendments to MAS Notice 637, which incorporated the Basel III capital reforms by the Basel Committee on Banking Supervision (“BCBS”) issued in December 2010 and revised in June 2011, as well as other policy enhancements arising from the MAS’ ongoing review of the capital rules and guidance.
MAS response to feedback received from Consultation Paper
On 14 September 2012, the MAS issued its response to feedback received from the Consultation Paper (the “Response”). The following are some of the issues clarified in the Response:
“Financial institution ”: The following entities will be considered financial institutions for the purposes of MAS Notice 637:
- Pawnshops and gold bullion traders;
- A financial holding company, which holds as a subsidiary, a banking institution or an insurance entity; and
- Entities that exist solely to issue securities which are not used as regulatory capital and whose activities are to provide financial services within the group
“ Regulated financial institution”: The following entities will be considered regulated financial institutions:
- Companies that conduct money‐changing and remittance business activities in Singapore; and
- Entities that carry on the principal activity of fund management in Singapore.
- Exposure measure for the leverage ratio: The exposure measure for the leverage ratio should generally follow the accounting measure of exposure. Where general allowances are netted from total assets in accordance with the relevant accounting standards, the exposure measure may be net of general allowances.
- Minimum requirements for capital instruments ‐Recognition of proceeds: The amount recognised as regulatory capital shall be net of issuance costs.
Minimum requirements for AT1 capital instruments and Tier 2 capital instruments ‐Inclusion of call options within the first five years from the issuance date: Call options are permitted within the first five years from the issuance date under the following situations, provided certain requirements are complied with:
- Where there is a change in the tax status of the capital instrument due to changes in the applicable tax laws of the country or territory in which the capital instrument was issued; or
- Where there is a change relating to the recognition of the capital instrument as regulatory capital for calculating Tier 1 CAR and Total CAR.
- Minimum requirements for AT1 capital instruments and Tier 2 capital instruments ‐Purchase or funding of the purchase of capital instruments: Some respondents highlighted that a reporting bank may not have sufficient influence over major stake companies to prohibit the purchase by such entities of the AT1 capital instruments and Tier 2 capital instruments issued by the reporting bank. Some respondents also viewed the inclusion of “major stake companies”within the scope of this requirement as being more stringent than the requirements under the Basel III capital framework. The MAS agreed and has amended the relevant paragraphs in MAS Notice 637 to limit the scope of this requirement to “banking group entities” and “associates”.
- Asset value correlation multiplier: A query was raised as to whether the computation of total assets for the determination of meeting the USD100 billion threshold would include the ultimate parent company or stop at the parent that is a financial institution. The MAS explained that for the purposes of computing total assets, the reporting bank shall use the reported total assets of the consolidated group of companies which include the regulated financial institution. The consolidation is not limited to a parent company that is a financial institution.
The following materials are available on the MAS website www.mas.gov.sg.