The MAS has published its response to a consultation on the amendments to take place as part of its ongoing implementation of Basel III capital adequacy rules.

The Monetary Authority of Singapore has published its response to a consultation on the amendments to take place as part of its ongoing implementation of Basel III capital adequacy rules in Singapore, part of which clarifies the definition of a financial institution.

The news, which sees makeshift outfits like pawnshops and gold traders come under the definition, could have a knock-on effect on the shadow banking industry in China, which is also in the process of becoming Basel III compliant. 

The city-state's financial watchdog last December invited Singapore banks to comment on proposed amendments to the regulations which will be rolled out as part of the reforms by the Basel Committee on banking supervision, issued in December 2010 and revised last June. 

The revisions to the MAS notice 637, to raise the quality of the regulatory capital base and to enhance risk coverage of the capital framework, and introduce the leverage ratio and capital buffer requirements, will be implemented on 1 January 2013.

The MAS paid particular attention to the definition of a financial institution, which one respondent sought clarification on. The respondent asked whether pawnshops and gold bullion traders, money changers, remittance agents, group holding companies, exempt fund managers and companies that exist solely to issue securities, would count as financial institutions. 

The MAS response was: "The Basel III text and further guidance include as financial institutions, insurance companies, broker/dealers,  banks, funds and entities whose main business activities include management of financial assets, lending, factoring, leasing, provision of credit enhancements, securitisation, investments, financial custody, central counterparty services and proprietary trading."

"As the principal activity of a pawnshop is to carry on the business of lending and the principal activity of a gold bullion trader is to carry on the business of dealing or trading in gold-related exchange-traded derivatives or over-the-counter derivatives, these will be considered financial institutions (under the new rules)."

Shadow banking

China is also in the midst of implementing Basel III, which it will adopt on 1 January 2013, inline with international norms. The news is expected to go someway towards opening up China's US$2.2 trillion shadow banking system, which analysts fear could threaten to bring the world's third largest economy to its knees.

China-based analysts at Bank of America Merrill Lynch said in a report in July that the amount of loans made by shadow banking entities amount to at least a quarter of all the loans made in China, by the traditional banking sector. The system is also highly leveraged, as many of these firms lend to riskier borrowers at higher rates. 

Pawn shops, according to the analysts, will probably provide the earliest sign that the system is crumbling. There are about 4,000 of these in China which provide short term loans on many types of collateral, from jewelry to cars and stocks and bonds.