The Banking Regulation Review: Singapore
Singapore has a reputation as a key regional and global hub for companies to do business. It has consistently been ranked one of the easiest places in the world to do business,2 and the most competitive country in Asia, enjoying a stable business environment.3
In July 2019, an assessment under the Financial System Stability Assessment of the International Monetary Fund (IMF) found Singapore's attractiveness as a financial centre to be underpinned by strong economic fundamentals, sound economic policies and a sophisticated financial oversight framework. The assessment by the IMF affirms Singapore's standing as a sound and stable financial centre.
The three local banks in Singapore – DBS Bank Limited, Oversea-Chinese Banking Corporation Limited and United Overseas Bank Limited – are on the list of the world's 50 safest banks in 2020 as compiled by Global Finance.
The Monetary Authority of Singapore (MAS) is banker and financial agent to the government and the central bank of Singapore. Following its merger with the Board of Commissioners of Currency on 1 October 2002, MAS has also assumed the functions of currency issuance. MAS's functions include:
- to act as the central bank of Singapore, including the conduct of monetary policy, the issuance of currency and the oversight of payment systems, and serving as banker to and financial agent of the government;
- to conduct integrated supervision of financial services and financial stability surveillance;
- to manage the official foreign reserves of Singapore; and
- to develop Singapore as an international financial centre.
MAS's approach is to utilise risk-based supervision, rather than to use prescriptive one-size-fits-all rules. MAS adopts a consultative approach in regulating the financial sector, actively seeking feedback from market practitioners and the public with a view to developing regulations that take into account market realities and industry practices.
The regulatory regime applicable to banks
Singapore-licensed banks come within the ambit of the Banking Act and the Monetary Authority of Singapore Act (the MAS Act), and are supervised and regulated by MAS. Banks have to comply with the provisions in the Banking Act and the MAS Act and the subsidiary legislation issued thereunder, as well as with notices, circulars, guidelines, practice notes and codes issued periodically by MAS.
There are two types of bank licences under the Banking Act: a full bank licence and a wholesale bank licence.
Full banks may provide the whole range of banking business permitted under the Banking Act, which includes deposit taking, the provision of cheque services and lending. While a full bank may engage in the full range of both Singapore dollar and non-Singapore dollar-denominated banking business, foreign banks with full bank licences are restricted in the number of branches and ATMs that they may operate. However, a foreign bank with a full bank licence that has been conferred with qualifying full bank privileges may operate at more locations, share ATMs among themselves and relocate their sub-branches freely.
Wholesale banks may engage in the same range of banking business as full banks, except they do not carry out Singapore dollar retail banking activities. They operate within the Guidelines for Operation of Wholesale Banks issued by MAS. They may additionally operate Asian currency units (ACUs). The ACU is an accounting unit that the banks use to book all their foreign currency transactions conducted in the Asian dollar market. MAS's approval is required for the operation of an ACU. Banks' Singapore dollar transactions are separately booked in their domestic banking units (DBUs).
Aside from the banking activities outlined above, banks may also carry on any other business that is regulated or authorised by MAS (including capital market services, financial advisory services and insurance broking), or otherwise prescribed or approved by MAS. Banks are, however, prohibited from engaging in non-financial activities.
In addition to the two categories of licensed banks, financial institutions may be approved by MAS to operate as merchant banks under the MAS Act. The operations of merchant banks are governed under MAS's directives to merchant banks. The scope of activities a merchant bank may undertake is generally narrower than that for licensed banks, but a merchant bank may also apply to MAS for approval to operate an ACU and thereby compete with licensed banks in the non-Singapore dollar banking market. Merchant banks will be regulated under the Banking Act when the provisions of the Banking (Amendment) Act 2020 come into force.
i Relationship with the prudential regulator
Banks are regulated and supervised by MAS. As a regulator, MAS aims to be business-friendly, adopting a consultative approach in developing regulations, typically through public consultation processes. MAS adopts risk-based supervision with the objective of fostering the safety and soundness of banks, and with promoting transparency and fair dealing in banks in relation to their customers and counterparties.
Under the risk-based approach, MAS employs the impact and risk model, which aims to reduce the risk and impact of the failure of banks or of inappropriate behaviour through increased supervision where it is appropriate and likely to be effective. The impact and risk model entails MAS evaluating and rating the impact and risk of a bank relative to other institutions. On combining the assessments of both impact and risk ratings, MAS is able to distinguish those banks that may pose a greater threat to the safety and soundness of the sector, and accordingly determine the level and intensity of supervision required.
MAS performs its supervisory responsibilities by checking on the quality of corporate governance, internal controls and risk management of the bank, and its dealings with its customers and counterparties. In this way, MAS hopes to encourage a system of sound management practices commensurate with the bank's type, scale and complexity of business activities, and their related risks.
MAS also reinforces the responsibilities of the board and senior management for the oversight and governance of the bank's activities and risk management and internal processes. As long as risks are adequately managed, MAS seeks to minimise the need to interfere with a bank's business operations.
ii Management of Singapore-incorporated banks
MAS places considerable emphasis on good governance and the quality of directors of Singapore-incorporated banks.
MAS's Guidelines on Corporate Governance for Financial Holding Companies, Banks, Direct Insurers, Reinsurers and Captive Insurers which are Incorporated in Singapore (the Guidelines) comprise the Code of Corporate Governance 2012 for companies listed on the Singapore Exchange Securities Trading Limited (SGX-ST) and supplementary principles and guidelines from MAS. The Guidelines and the Banking (Corporate Governance) Regulations 2005 define what is meant by an independent director, and set out the requirements for the composition of the board of directors and board committees, such as the nominating committee, remuneration committee, audit committee and risk management committee. The Guidelines also set out, inter alia, the principle that there should be a clear division of responsibilities between the leadership of the board of directors of a bank and the executives responsible for managing a bank's business, as well as the principle that there should be a strong and independent element on the board of directors of a bank that is able to exercise objective judgement on corporate affairs independently, in particular, from the management of the bank and 10 per cent shareholders of the bank (as defined in the Guidelines). The Guidelines also encourage the separation of the roles of chair and chief executive officer and outline how this is to be applied. The Guidelines further set out the principle that the board of directors of a bank should ensure that the bank's related-party transactions are undertaken on an arm's-length basis.
Inter alia, the remuneration committee of a bank reviews and recommends to a bank's board of directors a general framework of remuneration for the board of directors and key management personnel. Recommendations are also made regarding remuneration packages for each director and key management personnel.
While there are no restrictions on bonus payments to management and employees of a bank, a Singapore-incorporated bank is required to adopt the Principles for Sound Compensation Practices and Implementation Standards issued by the Financial Stability Board, which are intended to reduce incentives towards excessive risk taking that may arise from the structure of compensation schemes.
Separately, MAS Notice 637 on Risk-Based Capital Adequacy Requirements for Banks Incorporated in Singapore (MAS Notice 637) stipulates that the board of directors and senior management of a Singapore-incorporated bank are responsible for mitigating the risks arising from remuneration policies. In this regard, the compensation practices and policies of the Singapore-incorporated bank must not be unduly linked to short-term accounting profit generation. Instead, they should be linked to longer-term capital preservation and the financial strength of the bank.
iii Regulatory capital and liquidity
Minimum capital requirements
The Banking Act prescribes minimum capital requirements for banks. Other than where approved by MAS for wholesale banks, the minimum capital requirement for a Singapore-incorporated bank is S$1.5 billion.
MAS Notice 637 implements Basel III capital standards for Singapore-incorporated banks and establishes the minimum capital adequacy ratios (CARs) for banks incorporated in Singapore and the methodology for calculating these ratios. MAS Notice 637 also sets out the expectations of MAS in respect of the internal capital adequacy assessment process of Singapore-incorporated banks under the supervisory review process and specifies the minimum disclosure requirements for Singapore-incorporated banks in relation to their capital adequacy. MAS Notice 637 further sets out the data submission and disclosure requirements for assessing global systemically important banks.
MAS has imposed CAR requirements on a bank incorporated in Singapore at two levels:
- the bank stand-alone (solo) level CAR requirements, which measure the capital adequacy of a bank incorporated in Singapore based on its stand-alone capital strength and risk profile; and
- the consolidated (group) level CAR requirements, which measure the capital adequacy of a bank incorporated in Singapore based on its capital strength and risk profile after consolidating the assets and liabilities of its subsidiaries and any other entities that are treated as part of the bank's group of entities according to the applicable accounting standards (collectively called bank group entities), taking into account any exclusions of certain bank group entities or any adjustments pursuant to securitisation under MAS Notice 637.
In addition to complying with the CAR requirements in MAS Notice 637, a bank incorporated in Singapore should consider as part of its internal capital adequacy assessment process whether it has adequate capital at both the solo and group levels to cover its exposure to all risks.
Under MAS Notice 637, banks incorporated in Singapore that are designated by MAS as domestic systemically important banks (D-SIBs) are required to meet capital adequacy requirements that are two percentage points higher than the requirements of the Basel Committee on Banking Supervision (the Basel Committee), namely a minimum Common Equity Tier 1 (CET1) CAR of 6.5 per cent, a minimum Tier 1 CAR of 8 per cent and a minimum total CAR of 10 per cent. Other Singapore-incorporated banks are only required to maintain the minimum ratio in accordance with the Basel Committee's requirements.
In line with the Basel Committee's requirements, MAS introduced in MAS Notice 637 a capital conservation buffer of 2.5 per cent above the minimum capital adequacy requirements. The capital conservation buffer is met with CET1 capital and is currently 2.5 per cent. Including the capital conservation buffer, banks incorporated in Singapore that are designated by MAS as D-SIBs will be required to meet CET1, Tier 1 and total CARs of 9 per cent, 10.5 per cent and 12.5 per cent, respectively.
In addition, Singapore-incorporated banks are required to maintain a countercyclical buffer, which was phased in on 1 January 2016 and progressively increased until 2019. From 1 January 2019, the countercyclical buffer will range from zero to 2.5 per cent above the minimum CET1, Tier 1 and total CARs, the actual magnitude being determined by the weighted average of the country-specific countercyclical buffer requirements that are being applied by national authorities in jurisdictions in which a Singapore-incorporated bank has private-sector credit exposures.
Under MAS Notice 637, Singapore-incorporated banks are also required to maintain at all times a minimum leverage ratio of 3 per cent, to be met with Tier 1 capital. This is consistent with the Basel standard and applies at both bank-group and bank-solo levels.
A bank is required to hold minimum liquid assets (MLA) as specified in Section 38 of the Banking Act and in accordance with the requirements under MAS Notice 649 on Minimum Liquid Assets and Liquidity Coverage Ratio (LCR) (MAS Notice 649).
Banks designated by MAS as D-SIBs and 'internationally active banks' must comply with the LCR framework under MAS Notice 649. Other banks in Singapore may elect to comply with either the MLA framework or the LCR framework. An internationally active bank means a bank incorporated in Singapore that has been notified by MAS as being internationally active, taking into consideration whether the bank has one or more banking group entities outside Singapore that are approved, licensed, registered or otherwise regulated by a bank regulatory agency in a foreign jurisdiction to carry on banking business as defined in the Banking Act, and whether the banking group entity's operations are significant in that foreign jurisdiction.
The LCR framework implements the Basel III LCR rules, which are the global minimum standard for liquidity risk endorsed by the Group of Central Bank Governors and Heads of Supervision, and which require banks to hold sufficient high-quality liquid assets to match their total net cash outflows over a 30-day period. Banks in Singapore under the LCR framework that are D-SIBs or internationally active banks must maintain, at all times, a Singapore dollar LCR of at least 100 per cent and an all-currency LCR of 100 per cent. All other banks under the LCR framework must maintain, at all times, a Singapore dollar LCR of at least 100 per cent and an all-currency LCR of 100 per cent if the bank's head office or parent bank is incorporated in Singapore, or 50 per cent if the bank's head office or parent bank is incorporated outside Singapore.
Banks in Singapore under the MLA framework must hold, at all times, a minimum of 16 per cent of their qualifying liabilities (as defined in MAS Notice 649) denominated in all currencies in liquid assets denominated in any currency, and a minimum of 16 per cent of their Singapore dollar qualifying liabilities in Singapore dollar liquid assets. A bank in Singapore under the MLA framework must also hold, at all times, at least 50 per cent of its liquid assets held for the purposes of meeting its MLA requirements in Tier 1 liquid assets.
In addition, MAS imposes the Basel Committee's net stable funding ratio (NSFR) standard on banks designated by MAS as D-SIBs. The NSFR requires banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. Under MAS Notice 652 on Net Stable Funding Ratio (MAS Notice 652), D-SIBs incorporated and headquartered in Singapore are required to maintain an all-currency NSFR of at least 100 per cent at a banking group level, after excluding certain banking group entities. D-SIBs headquartered offshore are required to meet a minimum NSFR of 50 per cent at the entity level or at the country-level group basis (where approval has been obtained from MAS to comply on a country-level group basis).
Separately, under Section 39 of the Banking Act and MAS Notice 758 on Minimum Cash Balance (MAS Notice 758), a bank in Singapore is also required to maintain, during a maintenance period, an aggregate minimum cash balance with MAS of at least an average of 3 per cent of its average qualifying liabilities (as defined in MAS Notice 758).
iv Recovery and resolution
As is the case with any other company, the legislative framework for the insolvency of banks is found in the Companies Act. In addition, MAS has special powers over banks as set out in the Banking Act and the MAS Act. These special powers are designed for the protection of depositors in certain events, including where a bank becomes insolvent, is unable to meet its obligations, is going to suspend payments or is carrying on its business in a manner likely to be detrimental to the interests of its depositors or creditors. In these situations, under the Banking Act, MAS may require the bank concerned to take any action or refrain from doing an act. MAS may also appoint a statutory adviser to advise the bank on the proper management of its business. MAS may itself assume control of and manage the business of the bank, or appoint a statutory manager to do so.
Where a bank is incorporated outside Singapore, the advice given by the statutory adviser or control assumed by MAS or the statutory manager over the bank's business will only relate to the business or affairs of the bank carried on or managed in or from Singapore, or the property of the bank located in Singapore or reflected in the books of the bank in Singapore in relation to its operations in Singapore.
MAS also has broad supervisory powers under the resolution regime in the MAS Act. Apart from the provisions in the Companies Act, the MAS Act provides for additional grounds for the winding up of a bank. MAS may apply to the court for an order to claw back the salary, remuneration or other benefits of a director or executive officer in the previous two years in certain circumstances, including where the director or executive officer has failed to discharge his or her duties, or has misapplied or retained, or become liable or accountable for, any money or property of a bank. The clawback period may be extended if the director or executive officer has acted recklessly, fraudulently or dishonestly. MAS is further vested with the power to issue directions to a bank's significant associated entities that are incorporated or established in Singapore under certain circumstances, as well as to share information with a foreign resolution authority if the information is intended to enable such authority to deal with the resolution of a financial institution.
The MAS Act also empowers MAS to direct the compulsory transfer of business of the bank, and in the case of a bank incorporated in Singapore, MAS further has the power to direct compulsory transfers of shares or compulsory restructuring of the share capital of the bank upon certain preconditions being satisfied.
There is currently no formalised bail-out regime in Singapore.
Conduct of business
The Banking Act and the regulations and notices issued thereunder set out the primary statutory duties and liabilities of a bank carrying out banking business in Singapore. Breaches of the Banking Act and related subsidiary legislation may result in criminal sanctions. Additional duties and liabilities may also be imposed by MAS through guidelines. In this regard, while contravention of the MAS guidelines does not constitute a criminal offence, the degree of observance of such guidelines may affect MAS's overall risk assessment of an institution.
In addition, banks in Singapore are guided by the Code of Consumer Banking Practice (the Consumer Banking Code) and the Code of Conduct for Private Banking in Singapore (the Private Banking Code). The Consumer Banking Code serves as a best banking practice guide for retail banks, while the Private Banking Code sets out standards of good practice on competency and market conduct expected of banks (including their staff) operating in Singapore that provide financial services to high-net-worth individuals. Neither the Consumer Banking Code nor the Private Banking Code have force of law but arose from industry initiatives with the support of MAS.
Where a bank in Singapore carries on an activity that is regulated under the Securities and Futures Act (SFA) (e.g., advising on corporate finance, dealing in capital markets products or fund management) or the Financial Advisers Act (FAA) (e.g., providing financial advisory services), the conduct of business requirements under the SFA and the FAA, and the regulations, notices, circulars and guidelines thereunder, as the case may be, must be complied with. These requirements relate to various matters, including the appointment of representatives, keeping of books and, where applicable, the handling of customers' money and assets.
Privacy of customer information
Licensed banks in Singapore are subject to statutory obligations to protect the privacy of customer information, as set out in Section 47 of the Banking Act, which provides that customer information shall not in any way be disclosed by a bank in Singapore or any of its officers (including a director, secretary, employee, receiver or manager, and liquidator) to any other person except as expressly provided in the Banking Act. A breach of Section 47 is an offence.
The Banking Act provides for exceptions to the general prohibition against disclosure in Section 47. The exceptions are divided into two categories: the first category where the recipient of the information is not prohibited from further disclosing the information to any other person (category 1), and the second category where the recipient of the information is prohibited from further disclosing the customer information to another person, except as authorised under the Banking Act or if required to do so by an order of any court of competent jurisdiction in Singapore (category 2).
Disclosures pursuant to the exceptions in category 1 include those:
- permitted in writing by the customer;
- solely in connection with the insolvency of a customer;
- for the investigation and prosecution of certain criminal offences; and
- necessary for compliance with a garnishee order served on the bank attaching moneys in the customer's account.
Examples of permitted disclosures pursuant to the category 2 exemptions include disclosure solely in connection with the performance of duties as an officer of the bank or a professional adviser of the bank, and disclosure in connection with the outsourcing of the bank's operational functions.
Deposits form a significant funding base for banks in Singapore. The three local banking groups in Singapore are also listed on the SGX-ST and have issued securities to raise funds.
With respect to the management of liquidity in the Singapore banking system, MAS achieves this through daily money market operations and liquidity facilities.
MAS carries out money market operations every morning with a view to ensuring an appropriate amount of liquidity in the banking system to meet banks' demand for precautionary and settlement balances without being excessive. MAS carries out money market operations exclusively with primary dealers in recognition of their roles as specialist intermediaries in the Singapore Government Securities market and money markets. MAS may supply more or less liquidity than is required to meet banks' demand for precautionary and settlement balances, depending on the economic climate and market conditions.
Banks in Singapore may also avail themselves of two liquidity facilities provided by MAS that complement the daily money market operations: the Intraday Liquidity Facility and the Standing Facility. While money market operations provide for broad liquidity management, the liquidity facilities allow MAS to fine-tune the liquidity in the system and minimise intraday volatility in overnight interest rates.
Control of banks and transfers of banking business
i Control regime
Requirements relating to disclosure of substantial shareholding in voting shares are provided for in the SFA and apply only in relation to a Singapore-incorporated company listed on the SGX-ST and a foreign corporation with a primary listing on the SGX-ST (ListCo). Accordingly, only the listed entities in the three local banking groups are subject to the substantial shareholding notification regime.
Under this regime, a substantial shareholder is a person who has an interest in not less than 5 per cent of the total votes attached to all the voting shares (excluding treasury shares) of a ListCo. A substantial shareholder must notify the ListCo within two business days of becoming or ceasing to be a substantial shareholder, or when there is a change in the percentage level of the voting shares held.
In addition, a condition is typically found in the banking licence requiring the licensed bank to notify MAS of any changes or proposed changes in ownership or control over the bank that will result in a change in the entity or entities having effective control over the bank.
The Banking Act requires the prior approval of the Minister for Finance (the Minister) to be obtained at three threshold levels:
- before a person becomes a substantial shareholder of a Singapore-incorporated bank or an approved financial holding company under the MAS Act (together referred to as a designated financial institution (DFI));
- before a person, alone or with his or her associates, holds not less than 12 per cent of the shares of, or controls not less than 12 per cent voting power in, a DFI; and
- before a person, alone or with his or her associates, holds not less than 20 per cent of the shares of, or controls not less than 20 per cent voting power in, a DFI.
The Minister's prior approval is also required before a person becomes an indirect controller of a DFI (i.e., being in a position to determine the policy of the DFI, or being a person whose directions, instructions or wishes the directors of the DFI are accustomed to or under an obligation to act upon).
The Banking Act also requires prior written approval of the Minister before a Singapore-incorporated bank may be merged or consolidated with, or taken over by, another company.
Failure to obtain such prior written approval is an offence.
ii Transfers of banking business
Under the Banking Act, a bank in Singapore may transfer its business (including its non-banking business) to another bank in Singapore. The conditions for a voluntary transfer of the business of a bank are as follows:
- where the transferor is a bank incorporated in Singapore, the Minister has consented to the transfer or has certified that his or her consent is not required. The Minister will grant his or her consent to the transfer of business if:
- MAS is satisfied that the transferee is a fit and proper person, and the transferee will conduct the business of the transferor prudently and comply with the provisions of the Banking Act; and
- the Minister is satisfied that it is in the national interest to do so;
- where the transferor is a bank incorporated outside Singapore, the business to be transferred is reflected in the books of the transferor in Singapore in relation to its operations in Singapore;
- the transfer involves the whole or a part of the banking business of the transferor; and
- the Singapore High Court has approved the transfer.
Upon the Singapore High Court granting its order approving the transfer of business, the transferor's business will be transferred to and vested in the transferee (the transfer of any land being subject to the appropriate entries in the land registers).
The year in review
i Digital bank licences
MAS announced in June 2019 that it would issue up to two digital full bank (DFB) licences and three digital wholesale bank (DWB) licences. The digital bank licences allow entities, including non-bank players, to conduct digital banking business in Singapore. These licences mark a new chapter in Singapore's banking liberalisation journey and ensure that Singapore's banking sector continues to be resilient, competitive and vibrant. DFBs will be allowed to take retail deposits, while DWBs will focus on serving corporates and other non-retail segments. On 4 December 2020, MAS announced four successful digital bank licence applicants – two DFB applicants and two DWB applicants.
The applications were assessed on the following criteria:
- value proposition of business model, incorporating innovative use of technology to serve customer needs and reach underserved segments;
- ability to manage a prudent and sustainable digital banking business; and
- growth prospects and other contributions to Singapore's financial centre.
The assessment was done on a holistic basis, taking into account all relevant considerations for each criterion. MAS also took into consideration the eligible applicants' reviews of the business plans and assumptions underpinning their financial projections arising from the impact of covid-19.
ii Partial commencement of the Banking (Amendment) Act 2020
Pursuant to the Banking (Amendment) Act 2020 (Commencement) Notification 2020,4 certain provisions of the Banking (Amendment) Act 2020 came into operation on 1 October 2020, including:
- new Section 10C of the Banking Act provides that MAS may, by written notice, impose stable funding requirements on a bank or a class of banks in Singapore. MAS may restrict or suspend operations of a bank that fails to comply with MAS notices. A bank can be required by notice to disclose the manner in which it complies with any requirement imposed on it under the new Section 10C; and
- new Section 55(3) of the Banking Act expressly provides that it is an offence for a bank in Singapore to fail to comply with any direction given to it or any requirement imposed on it by a notice issued under the Banking Act. Previously, it was an offence to contravene any provision of the Banking Act for which no penalty was provided (including the previous Section 55(3) of the Banking Act), under the previous Section 71 of the Banking Act.
Outlook and conclusions
i Outstanding Banking (Amendment) Act 2020 provisions
On 2 December 2020, MAS issued the Consultation Paper on Proposed Amendments to Regulations, Notices and Guidelines Arising from the Banking (Amendment) Act 2020 and Other Changes. Most of the Banking (Amendment) Act 2020 provisions require supporting amendments to regulations, notices and guidelines before they can commence, and the Consultation Paper sets out the amendments for the provisions not yet commenced. On 1 October 2020, MAS enforced legislatively and operationally straightforward sections of the Banking (Amendment) Act 2020 that did not require further consultation.
MAS had also consulted the industry on supporting amendments to regulations, notices and guidelines arising from the removal of the DBU–ACU divide for banks in 2015.
ii Outsourced services
On 18 December 2020, MAS released the Consultation Paper on Notices to Banks and Merchant Banks on Management of Outsourced Relevant Services. The provisions of the Banking (Amendment) Act 2020 included the consolidation of the regulation of merchant banks under the Banking Act and the introduction of a new Section 47A, which applies where a bank in Singapore obtains or receives any relevant service from any branch or office of the bank located outside Singapore (including the head office of the bank) or any person.
The Consultation Paper sets out the proposed requirements in relation to the management of outsourced relevant services by banks and merchant banks in Singapore.