You are here

Burden of rescuing failed banks in Singapore likely to rest on MAS, shareholders: Moody's


THE Monetary Authority of Singapore (MAS) is more likely to resolve a failing bank by getting equity holders to pay the price than by forcing creditors to accept haircuts, Moody's Investors Service has said in a report.

Citing a recent review of the Singapore financial system by the Financial Stability Board (FSB), Moody's noted that Singapore's framework for "bail-ins" covers a narrow band of liabilities, which would limit the framework's ability to get creditors to share the pain in a default situation.

At the heart of the issue is the question of how to handle a failing bank. Before the European debt crisis, the typical response from a central bank may have been a bailout, in which the central bank or some other party injects capital into the troubled lender in exchange for equity. This allows creditors to get paid, but dilutes existing equity holders and exposes the rescuer to ownership risk.

Market voices on:

But in recent years, the "bail-in" has gained prominence as an alternative solution. In this case, creditors bear the bulk of the rescue cost by either taking a haircut on their claims, or by restructuring their debt to longer maturities or to equity.

Singapore's bail-in framework excludes senior debt from the pool of "bail-in-able" liabilities. Both FSB and Moody's have noted that this will limit the ability of the MAS to carry out an effective bail-in if one of Singapore's major banks gets into trouble.

Moody's acknowledged that the limitation is mitigated by the fact that the MAS is more focused on macroprudential policies and high regulatory standards that can prevent the need to rescue a bank in the first place. Indeed, Singapore's banks have the highest baseline credit assessments by Moody's in the world.

However, when push comes to shove, the narrow scope of Singapore's bail-in framework would render it "non-operational", the credit ratings agency said.

"Under the resolution regime in its current form and in the absence of a meaningful buffer of bail-in-able liabilities, we believe the MAS would likely resolve a failing domestic bank through a bailout," Moody's said.

In response, an MAS spokesman noted that Singapore banks have the highest average baseline credit assessments in the world - due in part to stricter capital requirements, rigorous stress testing and close supervisory oversight.

In designing the scope of the bail-in regime, MAS considered the trade-offs between a broader scope of bail-in - which would increase the loss-absorbing capacity of a bank - and the higher risk of contagion to the financial system and households, the spokesman noted.

"MAS will review the implementation experience internationally to assess if any change to our bail-in scope is warranted.

"In the event of a resolution, MAS will seek private sector solutions first, so as to minimise moral hazard and to instil market discipline."

If there are no viable private sector solutions, "the use of any public funds will be accompanied by stringent conditions", added the MAS spokesman. These include subsequent recovery of resolution costs from the industry.