Very Important Banks to weigh regulatory costs

[SINGAPORE] Singapore's proposed framework for systemically important banks here is bringing regulatory cost and issues back into focus. This comes as the Monetary Authority of Singapore (MAS) yesterday unveiled more details behind the framework first announced by MAS deputy chairman and Minister for Trade and Industry Lim Hng Kiang on Tuesday.

MAS said that it would evaluate these domestic systemically important banks on size, interconnectedness, substitutability and complexity - principles provided earlier by the Basel III committee. Banks will be assessed on these fronts every year.

A foreign bank deemed to be a systemically important bank here must meet prescribed liquidity coverage ratio (LCR), which was finalised on Tuesday after a consultation in August. This ratio, part of Basel III regulations, seeks to ensure that banks hold enough high-quality liquid assets to match their total net cash outflows over a 30-day period.

Foreign banks must meet a Singapore-dollar LCR of 100 per cent, and an all-currency LCR of 50 per cent by 2016. In effect, these ensure that banks hold enough assets such as cash or high-grade bonds - which can be sold quickly for cash - to cover shocks that can cause short-term credit freezes.

In particular, having an LCR for all significant currencies lowers the banks' dependence on the cross-currency swaps market which, as was seen in the crisis, can quickly turn illiquid in times of stress, said Gary Chia, head of financial services regulatory compliance at KPMG Singapore.

An estimate by East & Partners showed that about 23 per cent of the gross loan balances of $575 billion are denominated in foreign currency or lent offshore.

While less significant on a cost basis, the all-currency LCR will complicate things for banks with significant cross-currency holdings, said East & Partners analyst Paul Dowling.

The latest regulatory move is likely to affect foreign banks that are already defined as systemically important on a global level. These include JP Morgan, Barclays, BNP Paribas, Citigroup and Deutsche Bank.

Sources at foreign banks say that they are still reviewing the proposed rules; banks such as Barclays believe that they would not be defined as systemically important here, since they have no retail base.

Analysts say banks found to be systemically important here will eventually bear higher capital requirements. This is already so for global systemically important banks. They will also have to bear higher compliance costs to build recovery and resolution plans, which could hit profitability, said Frederic Bertholon-Lampiris, director of the financial-services industry at Deloitte Singapore.

But banks will also need to weigh these costs against the benefits of operating in a regulated environment, analysts say.

Meanwhile, the retail operations of HSBC and Maybank would probably need to be locally incorporated. As at last December, their Singapore deposits respectively represented 4.4 per cent and 3.4 per cent of total deposits in the banking system here, said a Jefferies report, which pointed out that the rule would create a level playing field for foreign and local retail banks in their competition for deposits. MAS wants a bank with significant retail presence - one criterion being its market share of resident non-bank deposits is at least 3 per cent - to incorporate that unit.

A Maybank spokeswoman said: "We are having on-going consultations with our head office on an overall strategic review for the Singapore operations and will also continue to engage MAS on this matter."

HSBC said that it would abide by the rules of the jurisdictions in which it operates; ANZ, which has a sizeable retail presence, said that it was reviewing the framework.

Wilson Woo, a partner in financial services at EY in Singapore, said: "Those banks with significant retail presence might have to consider separating retail operations from the 'universal bank'."

The Basel committee had in 2012 put out a broad framework that allowed national regulators to adopt the most suitable prescription for their respective jurisdictions. For example, MAS will use both quantitative and qualitative indicators in assessing complexity. It also indicated that banks with complex operations alone would not be scrutinised unfairly, in that "complexity in itself is unlikely to make a bank systemically important, unless the bank is also large in size, highly interconnected or is a provider of services that is hard to substitute". Its Hong Kong peer has proposed to look solely at qualitative measures to assess complexity.