INTRODUCTION The Monetary Authority of Singapore (“MAS”) has published a consultation paper (“Consult”) proposing a regulatory framework for systemically important banks in Singapore. This Consult puts forward an overview of the proposed regulatory framework, the assessment methodology for identifying systemically important banks in Singapore, the policy measures to be applied toward such banks and the implementation timeline for the proposed regulatory framework. BACKGROUND During the global financial crisis of 2007 and 2008, public funds were used to bail out several global systemically important financial institutions (“FIs”). This prompted G-20 leaders to call on the Financial Stability Board to develop a policy framework to address such negative externalities associated with systemically important FIs. In 2011, the Basel Committee on Banking Supervision (“BCBS”) published a framework for assessing global systemically important financial institutions (“G-SIBs”). To complement the G-SIB framework, BCBS subsequently also published a framework for assessing domestic systemically important banks (“D-SIBs”). The BCBS D-SIB framework is a principles-based framework comprising a set of twelve principles and allows national authorities discretion to adopt the appropriate measures based on the characteristics of each jurisdiction’s financial system. To tie in with the implementation timeline for the G-SIB framework, national authorities are expected to develop and implement a D-SIB framework by 1 January 2016. It is also expected that national authorities publicly disclose an outline of the assessment methodology for their D-SIB framework. OVERVIEW OF THE PROPOSED D-SIB FRAMEWORK MAS has indicated that its objectives are to develop a D-SIB framework that will update its diagnostic toolkit for assessing systemic importance and identifying D-SIBs and establishing a range of policy measures that may be applied toward D-SIBs. Under the current supervisory framework, MAS performs regular assessments of FIs to calibrate the degree and nature of supervisory attention paid to each FI. Such impact assessments also capture the relative systemic importance of an FI within the financial system. It is intended that the proposed D-SIB framework build on the existing impact assessment framework to determine the degree and nature of supervisory attention for D-SIBs as well as establish other relevant policy measures that may apply to D-SIBs to address the specific negative externalities that they pose. Towards this end, MAS proposes to assess locally incorporated banks, including subsidiaries of foreign banks, and foreign banks branches under the D-SIB framework. For locally-incorporated banks, the assessment will be at the consolidated group level, whilst for foreign banks, the activities of all related banking entities in Singapore will be taken into account. MAS also intends to classify FIs designated as D-SIBs into the following three categories according to their structure; locally-incorporated bank groups headquartered in Singapore, foreign bank groups comprising locally-incorporated foreign bank subsidiaries and sister branches if any and foreign banks that operate only as branches, and to apply the appropriate policy measures based on such classification. ASSESSMENT METHODOLOGY Assessment indicators MAS proposes to use the following four indicators of size, interconnectedness, substitutability and complexity in an indicator-based approach for assessing whether FIs are to be designated as D-SIBs. Size Size MAS notes that size is an important assessment factor as the larger a FI’s share of domestic banking activity, the more likely its failure will adversely affect Singapore’s financial markets and economy. MAS proposes to use “share of banking system assets” and “share of total non-bank deposits” as measures of size. To identify banks with a significant retail presence, MAS will also use “share of resident non-bank deposits” and “number of depositors with accounts less than or equal to S$250,000”. MAS also notes that it would not be appropriate to use total exposures as defined in the Basel III leverage ratio as a measure of size as only locally-incorporated banks are required to comply with the reporting requirements relating to the Basel III leverage ratio. Interconnectedness Interconnectedness Interconnectedness Interconnectedness InterconnectednessInterconnectednessInterconnectedness InterconnectednessInterconnectedness InterconnectednessInterconnectedness MAS notes that FIs operate in a network of contractual obligations and banks with significant linkages within a financial system are likely to cause spill over effects and contagion in the event of financial distress. To assess interconnectedness within the Singapore financial system, MAS proposes to do a network analysis of the interbank system to identify key banks with significant linkages. MAS also proposes to use the standalone indicators “share of amount due to banks” and “share of amount due from banks” to identify large interbank players given that such large interbank borrowers or lenders may not be identified by network analysis alone. Sub stitutabilitystitutability stitutability stitutability stitutability stitutability For banks which play significant roles as market participants or service providers, MAS notes that it would be difficult and potentially costly to find a substitute bank that can provide the same service in a timely manner if such banks’ services were to be interrupted. Banks which provide key specialised services or infrastructure services should thus be designated as systemically important. MAS proposes to use “share of MAS Electronic Payment System (MEPS+) 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” as indicators of substitutability. This differs from the substitutability indicators under the BCBS G-SIB framework which are “assets under custody”, “payments activity” and “underwritten transactions in debt and equity markets”. MAS is of the view that its proposed indicators better reflect the functions and activities that are essential to the functioning of Singapore’s financial system. Complexity Complexity ComplexityComplexityComplexity Complexity MAS is of the view that a bank’s business, structural and operational complexity can amplify its systemic importance. Whilst the BCBS G-SIB framework uses “notional amount of over-the-counter (OTC) derivatives”, “level 3 assets”, and “trading and available-for-sale securities” to assess complexity, MAS proposes to use a combination of quantitative and qualitative indicators to assess complexity. Quantitatively, MAS proposes to use “share of gross OTC derivatives outstanding”, as it becomes more difficult to resolve a bank when a large portion of its derivatives outstanding is not cleared through a central counterparty. MAS notes that the G-SIB indicators “level 3 assets” and “trading and available-for-sale securities” are less relevant for Singapore banks as they make up only a small component of banks’ activities here. Qualitatively, MAS proposes to use “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, and if centralised, the location of these key functions”. Assessment approach MAS is of the view that a bank which is significant in any of the three indicators of size, interconnectedness or substitutability may be deemed systemically important. However, MAS notes that complexity on its own may not make a bank systemically important and complexity would have to be assessed in the context of size, interconnectedness and substitutability. MAS has also indicated that the assessment of systemic importance will not be done in a mechanistic manner, but will involve the exercise of supervisory judgement. MAS further mentioned that where a bank has a “significant retail presence”, such a bank may be designated as a D-SIB. The proposed criteria of assessment for “significant retail presence” would be whether a bank’s share of resident non-bank deposits is greater or equal to three percent and whether the bank has at least 150,000 depositors with account deposits of less than or equal to S$250,000. Periodic review of D-SIBs MAS proposes to review the list of D-SIBs annually and, in addition, proposes a two year observation period for changes in D-SIB status. For example, a bank not previously designated a D-SIB will have to be assessed as a D-SIB for two consecutive years before it will be designated as a D-SIB in the third year. MAS’ rationale for this is to be certain of a bank’s status before applying the appropriate policy measures. Notwithstanding the two year observation period, MAS has also indicated that it recognises that there may be instances where the systemic importance of a particular bank may change permanently due to reasons such as inorganic growth or operational restructuring. In such instances, MAS proposes to exercise its discretion to re-designate the D-SIB status of the bank accordingly. POLICY MEASURES MAS proposes that each type of D-SIB be subject to the following policy measures. For locally-incorporated bank groups, the policy measures of a higher loss absorbency (“HLA”) requirement, a liquidity coverage ratio (“LCR”), recovery and resolution planning, enhanced disclosure and effective risk data aggregation and risk reporting. For foreign bank groups comprising locally-incorporated banks and sister branches (if any), the above requirements for a locally-incorporated bank group are to be applied. Where there are sister branches, the branches will also be subject to the measures of a LCR requirement, recovery and resolution planning, additional disclosure as well as effective risk data aggregation and risk reporting. For foreign bank branches, they will be subject to a local incorporation requirement for their retail operations if such branches have a significant retail presence. In addition, they will be subject to the measures of a LCR requirement, recovery and resolution planning, additional disclosure as well as effective risk data aggregation and risk reporting. HLA requirement MAS has indicated that the applicable capital requirements for local banks will be tiered based on their designated systemic importance. For D-SIBs, MAS proposes that they will be required to hold two percentage points of HLA (in the form of Common Equity Tier 1 capital as defined in MAS Notice 637) above the BCBS prescribed minimum capital requirement. Other banks not designated as D-SIBs will be required to hold the BCBS prescribed minimum capital requirement. In instances where MAS is the home authority, MAS proposes to apply the HLA requirement at the parent/consolidated level, and in instances where MAS is the host authority, MAS proposes to apply the HLA requirement at the sub-consolidated/subsidiary level. For banks identified as both D-SIBs as well as G-SIBs, MAS also proposes that the higher of either the D-SIB or G-SIB requirement will apply. For instances where a D-SIB is held under a MAS regulated Financial Holding Company (“FHC”) and the FHC is predominantly a banking group, the capital adequacy and HLA requirement will apply at the FHC group level. Local incorporation requirement MAS had previously announced that existing Qualifying Full Banks important to the domestic market would be required to locally incorporate their retail operations for better depositor protection. MAS proposes to include this local incorporation requirement as one of the D-SIB policy measures, and as such, any Full bank designated as a D-SIB by virtue of its significant retail presence will be required to locally incorporate its retail operations. MAS has also indicated such D-SIBs will be given an adequate transition period to comply with this requirement. LCR requirement MAS has indicated that it will require D-SIBs to meet the LCR requirement and will separately release further details regarding the implementation of the liquidity rules. Nevertheless, the current Consult provides some detail as to the implementation of the LCR requirement. MAS proposes to require locally-incorporated bank groups to meet an all currency LCR requirement of 60% with effect from 1 January 2015. This will be increased by 10% points each year to 100% by 1 January 2019. In addition, MAS will require such banks to meet a SGD LCR requirement of 100% with effect from 1 January 2015. For foreign bank groups or branches designated as D-SIBs as of 1 January 2016, MAS proposes to require such banks to meet an all-currency LCR requirement of 50% with effect from 1 January 2016. MAS’ rationale is that the lower all-currency LCR requirement (as compared to local banks) is justified taking into consideration the parental support that foreign banks may have for part of their non-SGD funding needs. MAS also proposes that with effect from 1 January 2016, D-SIB foreign bank groups or branches will be required to meet a SGD LCR requirement of 100%. Recovery and resolution planning MAS proposes to require D-SIBs to undertake recovery and resolution planning with such requirements to be phased in and applied in a manner proportionate to the D-SIB’s systemic importance. For D-SIBs which are part of a foreign bank group, recovery and resolution planning may be done in consultation with the parent bank or head office, and may include aspects of the group recovery plan, as long as Singapore operations are addressed. MAS has also indicated that for D-SIB foreign bank groups, where MAS assesses that the systemic importance of the sister branches and the contagion risk between the foreign bank subsidiaries and branches in Singapore are not material, MAS may exercise supervisory judgement to not apply the recovery and resolution planning requirement to the foreign bank branch. Enhanced disclosure To ensure that MAS’ D-SIB disclosure requirements are aligned with international standards MAS has indicated that it will review its current disclosure requirements under MAS Notice 637 once BCBS completes the current review of the its Pillar 3 disclosure requirements. In addition to the disclosure of financial statements under section 25 of the Banking Act, MAS proposes that additional disclosure requirements will apply to foreign bank branches that are designated as D-SIBs (“D-SIB Branches”). MAS has indicated that such disclosure requirements may include information on sectorial and/or geographical breakdown of exposures, non-performing loans, provisions for loans and advances for exposures maintained in the local entity in Singapore, and the contractual or notional amounts of off-balance sheet exposures. With regard to this point, MAS proposes that where a D-SIB foreign bank group has both a branch and a locally-incorporated subsidiary in Singapore, the branch would also need to comply with the additional disclosure requirements. MAS also proposes that where a D-SIB Branch adopts the same risk management policies as the parent bank and such information is disclosed by the parent bank, MAS may allow the branch to make reference to the parent bank’s disclosure by making such disclosure available on the website of their Singapore branch. MAS’ stated rationale for this is to reduce the reporting burden on the D-SIB Branch in complying with the proposed additional disclosure requirements. MAS has also indicated that for D-SIB foreign bank groups, where MAS assesses that the systemic importance of the sister branches and the contagion risk between the foreign bank subsidiaries and branches in Singapore are not material, MAS may exercise supervisory judgement to not apply the additional disclosure requirements to the foreign bank branch. Effective risk data aggregation and risk reporting In January 2013, BCBS published a set of principles for effective risk data aggregation and risk reporting (“BCBS Risk Principles”). MAS proposes that all D-SIBs comply with the BCBS Risk Principles and implement effective risk data aggregation and risk report practices within three years of their designation as D-SIBs. IMPLEMENTATION TIMELINE MAS proposes to publish the initial list of D-SIBs, which will include D-SIB branches (if any), by the first quarter of 2015 with the intention of providing banks with sufficient time to comply with relevant D-SIB policy measures. This list of D-SIBs will be determined based on end-2013 data. Thereafter, MAS proposes to publish the list of D-SIBs annually after each D-SIB assessment exercise. MAS also proposes that the D-SIB framework, including the methodology and assessment indicators, be reviewed every three years, with the outcome of the review to be announced by MAS upon its completion. MAS has indicated that a periodic review will take into account developments in the banking sector and assessment methodologies whilst a fixed review period will provide clarity and certainty on the frequency of reviews and provide assurance that the framework is kept up-to-date.
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Consultation Paper on “Proposed Framework for Systemically Important Banks in Singapore”