New bank liquidity rules take effect in January 2015

A major change is that the framework will apply to all currencies
By Yasmine Yahya, The Straits Times, 25 Jun 2014

TIGHTER rules aimed at bolstering the cash buffer banks must hold in case of emergency will take effect in January, Trade and Industry Minister Lim Hng Kiang said yesterday.

The new regulations centre on what is called a Liquidity Coverage Ratio, a standard introduced under Basel III, the term given to wide-ranging reforms being implemented in the global banking industry. It seeks to ensure that banks hold sufficient high-quality liquid assets to match their total net cash outflows over a 30-day period.

The Monetary Authority of Singapore (MAS) consulted the public and the banking industry on these changes last August and took their feedback into account when finalising the new rules, Mr Lim said at an Association of Banks in Singapore dinner.

One major change is that the new liquidity framework will apply to all currencies.

Many banks in Singapore hold a large portion of their liabilities, which include deposits, in foreign currencies, Mr Lim noted.

The current liquidity regime, known as the Minimum Liquid Assets (MLA) requirement, applies to Singapore dollar-qualifying liabilities only.

Both local and foreign banks will also need to meet a Singdollar liquidity requirement under the new rules.

However, the MAS will adopt a two-tier approach in this area, Mr Lim said.

Banks deemed systemically important to Singapore will have to meet the new requirements but all others can choose to comply with the new regime or remain on the MLA.

The three local banks - DBS, OCBC and UOB - will have to meet:

- a Singdollar liquidity coverage ratio of 100 per cent by January next year; and

- an all-currency liquidity coverage ratio of 60 per cent, also by January but increasing by 10 per cent each year to 100 per cent by 2019.

This is consistent with the Basel III implementation timeline for all internationally active banks.

The Government also plans to roll out a framework to hold banks that are "systemically important" to the domestic market to higher regulatory standards, Mr Lim added.

"Strong capital resources cushion a bank against losses. This improves its solvency as a going concern and, in extremis, offers a measure of protection to depositors and helps insulate the wider system against spillovers in the event of a bank resolution."

But strong capital positions alone are no guarantee against financial instability.

And as the collapse of Lehman Brothers showed, the financial difficulties of a large complex bank in distress can extend far beyond the institution and threaten the stability of the overall financial system and even the national economy, Mr Lim noted.

The MAS will soon issue a consultation paper on its proposals for a framework for such systemically important banks, he said.

It will use factors such as size, interconnectedness to the financial system and its overall complexity when assessing a bank's systemic importance.

Systemically important banks will then have to meet higher standards, such as having well-developed recovery and resolution plans in the event of distress.

And those bank branches with a significant retail presence will be required to locally incorporate their retail operations.

Mr Lim said the MAS proposes to regard a bank as having a significant retail presence if its market share of resident non-bank deposits is 3 per cent or more and if it has 150,000 or more depositors with accounts of under $250,000.

OCBC Bank said it has been preparing to meet the requirements of Basel III over the last few years and is already compliant with MAS' liquidity framework.

"We constantly optimise our funding composition and manage liquidity risks by strengthening our non-bank deposit franchise and diversifying into other stable funding alternatives," said Mr William Goh, OCBC's head of corporate treasury.

Banks in S'pore may face difficulties in meeting new liquidity rules
By Linette Lim, Channel NewsAsia, 25 Jun 2014

Banks in Singapore may face difficulties in meeting the new liquidity requirements that were announced on Tuesday.

Analysts say they would have to hold more liquid, or safer assets, at a time when consumers are clamouring for higher returns on their deposits.

Come next January, the three local banks -- DBS, OCBC, and UOB -- will need to have a liquidity coverage ratio of 100 per cent for Sing-dollar liabilities.

This means that in the event of a crisis, like a bank run, they will have enough liquid assets to cover every dollar that is deposited. In addition, they will also need to hold liquid assets in foreign currencies.

Local banks will need to cover 60 per cent of their non-Sing-dollar liabilities. This will gradually increase to 100 per cent by 2019.

The new liquidity rules have been welcomed by most banks. But some analysts say the higher liquidity coverage ratios, as well as the tight deadlines to meet these ratios, could be a problem and dampen the growth of the banking sector.

"This dramatic adjustment of portfolios, government bonds, or anything that will give them access to liquidity or helps them shore up liquidity… is not going to be easy for any bank,” said Cyrus Daruwala, managing director of Asia Pacific at IDC Financial Insights.

“One thing for sure, it affects their positions in the market, and it affects their future growth, because with that stringent regulation and dos and don'ts, there is that much little that they can play with."

Foreign banks will also come under new liquidity requirements.

Those deemed to be systemically important -- meaning those with significant retail operations in Singapore -- will need to cover 100 per cent of their Sing-dollar liabilities and 50 per cent of foreign currency liabilities by January 2016.

"Given that Singapore's such a large trading centre for international currencies and foreign exchange trading, some of the foreign banks which have large foreign currency trading as part of their Singapore operations may particularly face some difficulties with the transition period," said Rajiv Biswas, Asia Pacific chief economist at IHS.

The tighter rules reflect global regulatory changes that have been made in the wake of the 2008 financial crisis but analysts say this puts the banks in a spot.

"Do we incentivise the bank, or do we message the bank saying, ‘I'm happy with smaller returns and smaller interest rates.’ And if the answer is no, on one hand, we the consumers are incentivising institutions to take that risk, on the other hand, we want our capital and our growth to be secure," said Mr Daruwala.

Still, with the new requirements in place, industry observers say when competition heats up, Singapore will be one jurisdiction depositors can feel secure in. 

MAS to pinpoint 'too big to fail' banks
New framework to gauge their 'systemic importance'
By Yasmine Yahya, The Straits Times, 26 Jun 2014

A SWEEPING review of how Singapore's "too big to fail" banks can be identified and regulated is under way, with the public asked to help out.

The aim is to devise a framework that can be used to assess just how systemically important a bank is to Singapore's economy and set stricter rules for key players.

The concern driving the review being conducted by the Monetary Authority of Singapore (MAS) is that these banks could pose a widespread risk to the financial system and broader economy if they got into distress.

Introducing such a framework is in line with steps that countries all over the world have had to take under Basel III, the set of reforms aimed at raising standards in the global banking industry.

The proposed framework, which will build on existing MAS policies and take in feedback from the industry and wider public, was laid out in a consultation paper released yesterday.

It outlines the indicators the MAS will use to assess whether a bank is systemically important and includes a set of standards it will have to meet.

Under the proposals, a bank will be considered systemically important based on four broad factors - size, interconnectedness with other financial institutions, how easy or difficult it would be to substitute its services with those provided by another bank and its complexity.

The MAS proposes to use two measures to determine a bank's size - its share of the total banking system assets in Singapore and its share of total non-bank deposits.

To identify banks with a significant retail presence, the MAS will look at each bank's share of resident non-bank deposits and the number of depositors it has with accounts holding $250,000 or less.

Those with a share of resident non-bank deposits of 3 per cent or more and 150,000 or more depositors with accounts holding $250,000 or less will be considered to have a significant retail presence.

If a foreign bank is assessed to have a significant retail presence, it will be required to locally incorporate its retail operations.

The MAS proposes to assess a bank's interconnectedness within the domestic financial system via a network analysis of the interbank system.

Banks operate within a network of contractual obligations with one another so financial distress at one institution can generate spillover effects and raise the likelihood of trouble at others.

Banks which have large and numerous direct and indirect linkages within a financial system will be deemed systemically important, the MAS said.

A bank might not have a large retail or interbank presence in Singapore yet still be named a systemically important one if it offers specialised services that other banks cannot replicate easily.

To identify such banks, the MAS proposes to study four indicators, including the bank's share of assets under custody, its share of values of underwritten transactions in debt and equity markets and whether it is a US-dollar cheque settlement bank.

"The larger the role a bank plays as a market participant or service provider, the greater the potential for widespread disruption if the bank's services were to be interrupted," the MAS noted.

"Finding a substitute bank that can provide the same service in a timely manner will also be more difficult and potentially costly."

A bank's business and its structural and operational complexity could also amplify its systemic importance, the MAS said. More time and resources would be required to resolve a more complex bank under distress, potentially causing larger spillover effects. The MAS proposes to assess a bank's complexity by looking at its share of gross over-the-counter 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.

Complexity will be assessed by looking at factors such as the number of jurisdictions the bank operates in and the number of business units it has. A bank's size, interconnectedness and how easily its services can be substituted will also be factored in.

The MAS will conduct an annual assessment to review the list of systemically important banks to account for any changes in their risk profiles or business models.

Besides more intensive supervision, each of these banks will be subject to higher standards. For example, each must draw up a comprehensive recovery and resolution plan in the event of distress. They will also have to enhance their disclosure practices and beef up their capital and liquidity buffers.

The MAS plans to publish the initial list of systemically important banks by the first quarter of next year to give them sufficient time to comply with relevant policy measures. This list will be determined based on data from the end of last year.

Foreign bank branches identified for local incorporation will be given an adequate transition period for the local incorporation process, the MAS added.

The list of systemically important banks will be published annually after each assessment exercise.

The MAS also plans to conduct a review of the whole framework itself, including the methodology and indicators, every three years.

"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."