More powers for MAS to resolve problems at banks in distress

Singapore

THE Monetary Authority of Singapore (MAS) will hold more powers to resolve problems of distressed financial institutions in an orderly way.

Ong Ye Kung, Minister for Education (Higher Education and Skills) & Second Minister for Defence, presented the second reading of the MAS (Amendment) 2017 Bill in Parliament on Tuesday. The Bill has been passed.

Presenting the Bill on behalf of Tharman Shanmugaratnam, Deputy Prime Minister, Coordinating Minister for Economic and Social Policies, and Minister-in-charge of MAS, Mr Ong, who is also a member of the MAS board, said the update to Singapore's resolution laws is to ensure effective handling of a financial institution that gets into serious trouble, and especially to avoid contagion or a loss of confidence in the system.

"Our entire supervisory system is geared to reduce the risk of an FI (financial institution) in Singapore failing, but it is not possible to rule out such an eventuality, especially as our financial system is closely integrated with the global financial system," said Mr Ong.

MAS will now have financial institutions deemed systemically important - including banks colloquially known as those "too big to fail" - to prepare recovery plans and submit them for resolution planning. The "domestic systemically important banks" in Singapore are DBS Bank, OCBC Bank, UOB, Citibank, Standard Chartered, Maybank and HSBC. They process 90 per cent of the total volume of retail transactions here. MAS will also apply the recovery and resolution planning requirement to financial institutions with critical functions here.

To ensure orderly resolution of a troubled financial institution, MAS will now hold powers to temporarily block most counterparties' rights to terminate contracts with a financial institution undergoing resolution.

The Bill also allows MAS to write down or convert a financial institution's debt into equity via a statutory bail-in regime. Such a bail-in - meant to resuscitate an ailing financial institution by restructuring the debt held by the institution's bondholders - can help to recapitalise distressed financial institutions, and reduce both the risk to depositors and reliance on taxpayers to "bail out" such troubled financial firms. This will for now apply to locally incorporated banks and bank holding firms.

MAS will recognise resolution actions taken by a foreign regulator on financial institutions here, so long as such actions do not prejudice domestic financial stability, result in inequitable treatment of Singapore creditors and shareholders, run contrary to Singapore's national interest, or have material fiscal implications.

The central bank will also provide for compensation to creditors of troubled financial institutions who are more adversely affected in a resolution than they would have been in a liquidation, said Mr Ong. But this will apply only when MAS forces a transfer of business, or forces a restructuring of share capital or a bail-in. This compensation would also apply only when MAS recognises similar resolution actions from foreign regulators.

The compensation will be determined by a valuer appointed by the Minister-in-charge of MAS, and be paid out of a resolution fund. MAS will first provide a temporary loan to the resolution fund for its immediate operating needs. Withdrawals from the resolution fund will be recovered from the industry later. MAS will consult the industry on how to determine such levies.

The Bill will also include a new provision that explicitly states MAS's development objective of growing Singapore into an internationally competitive financial centre is subordinate to its supervisory objective of fostering financial stability, said Mr Ong. "This makes explicit in the Act, a principle that has in fact been observed by the MAS all along."