MAS Tells Singapore-Based Banks How To Prepare For The Worst

Tom Burroughes

26 June 2014

Singapore’s monetary regulator has set out updated rules on how banks operating in the city-state must keep liquid assets aside to deal with market blowups. New rules start coming into force next January.

Lim Hng Kiang, deputy chairman of the .

Liquidity

The MAS deputy chairman also set out new rules on liquidity. Under the existing MAS’ minimum liquid assets requirement, lenders must have sufficient eligible assets to cover a specified share of qualifying liabilities, in case there is a sudden demand for cash – as was the case in 2008. In 2008, the Singapore regulator moved from a “single headline MLA ratio for all banks to one more attuned to specific circumstances of a bank". Last year, the MAS set out a range of risk management principles to guide banks further on how to deal with liquidity issues.

The new “Liquidity Coverage Ratio” is a standard that takes its lead from the Basel III international banking standards. The LCR tries to ensure that banks hold sufficient high quality liquid assets to match their total net cash outflows over a 30-day period.

The regulator said the LCR is more “risk-sensitive” than the MLA.

“Whereas the MLA is based on balance sheet liabilities at a single point in time, the LCR calibrates liquidity requirements based on expected net outflows over a 30-day stress period. The LCR requirement takes into account the experience of banks globally during stress scenarios and better aligns regulatory requirements with the actual liquidity risks that banks may face,” he said.

Foreign banks, currency requirements

Lim Hng Kiang said foreign banks in Singapore will continue to be subject to MAS’ liquidity requirements. He noted that many such banks in Singapore operate under a universal banking model, and several are funding centres for related entities in Singapore or other affiliates within their groups. This situation carries certain risks, however. This means that “while MAS recognises that there may be cost efficiencies in managing liquidity centrally at the group level, there can be significant obstacles to the free movement of liquidity across borders during a stress scenario. Thus, foreign banks operating in Singapore will be required to maintain some liquid assets in Singapore to support their local liquidity needs”, he said.

Also, the new liquidity framework will apply to all currencies; at present the minimum liquid assets requirement applies only to Singapore dollar-qualifying liabilities. Going forward, this will apply to all currencies with the aim of making sure banks manage their forex risks appropriately. Foreign banks must have a Singapore dollar liquidity coverage ratio of 100 per cent – they will need, in an emergency, to have enough liquid assets to cover cashflows during 30 days of turmoil.

OCBC already complies with the liquidity framework for 2015 and DBS is “comfortable” with the requirements as they’re in line with Basel III rules, the banks said, according to Bloomberg. It did not mention UOB’s position.

Turning to the broader economy, the regulator added: “The global economy continues to recover. Economic activity in the US has rebounded from a weak start, and is expected to pick up pace in the second half of 2014. The eurozone and Japan should post modest growth for the year as a whole, supported by highly accommodative monetary policies. The upturn in the advanced economies bodes well for Asia. In China, the authorities are addressing financial vulnerabilities even while attempting to restructure the economy for longer-term growth. The decisive election result in India has raised high hopes for an investment-led turnaround in the economy. Barring shocks, the Singapore economy can be expected to grow by 2-4 per cent in 2014.”

“On the financial front, an uneasy calm seems to have settled in markets but we remain in uncharted waters as the US proceeds to unwind its unprecedented monetary stimulus. Banks and regulators must still be vigilant against obvious and hidden risks, and be prepared for bumps on the road to global interest rate normalisation, he said.