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     FrontPage Edition: Mon 22 January 2007

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The Banking (Amendment) Bill passed


Second Reading Speech by Mr Lim Hng Kiang, Minister for Trade & Industry and Deputy Chairman, Monetary Authority of Singapore

Mr Speaker Sir, on behalf of the Senior Minister, I beg to move that the Bill be now read a second time.
Over the past few years, MAS has progressively liberalised the banking sector. At the same time, MAS has also sought to implement a risk-based supervisory approach that moves away from one-size-fits-all rules and allows for well-managed risk-taking.
The measures have resulted in more choices to consumers, new innovative products and competitive pricing.
With the free play of market forces and the growing complexity and international nature of banking business, there will also be new risks to be addressed. For example, depositors are increasingly exposed to the risks of both local and foreign banks' expanding international operations.
MAS continuously reviews and refines its regulatory framework to ensure that it is robust and responsive, without adding undue burden and cost to the industry; a framework that upholds prudential standards and the interests of depositors, while fostering the growth of the sector.
The Banking (Amendment) Bill is part of this on-going process. It introduces several new policies and measures to strengthen prudential safeguards, facilitate risk-based supervision and provide banks with greater operational flexibility.
In preparing this Bill, MAS has consulted extensively with the industry and the public on the policy changes and the draft Bill.
The feedback received was carefully considered, and incorporated into the Bill where practicable and consonant with its regulatory objectives.
Mr Speaker Sir, I will now go through the major amendments in the Bill.
In terms of strengthening prudential safeguards for the protection of depositors, I shall elaborate on three main ones.
Revision of methodologies for limiting large exposures and related party exposures
Currently, section 29 of the Banking Act sets prudential limits on credit facilities extended by banks to a single borrower or a group of related borrowers. It also curtails unsecured credit facilities to parties related to the bank.
These prevent the default of any single borrower from seriously impacting the financial strength of a bank.
MAS is introducing a number of changes to ensure that the prudential limits remain relevant and are in line with international best practice.
First, instead of a limit based on credit facilities granted, the Bill introduces a more comprehensive measure based on exposures, which would include a bank's equity investment in, as well as other transactions with a counterparty.
The second key change is that MAS will recognise a bank's efforts in mitigating risks, by allowing the bank to offset its exposures where these are secured by qualifying collateral, or to substitute its exposures to a counterparty with that of a credit protection provider of good rating.
To reduce the risk of contagion and non-arm's length transactions between a bank and a related party, the current limit on unsecured lending to related corporations will be widened to restrict the exposures of a bank incorporated in Singapore to its substantial shareholder groups, and exposures of a bank in Singapore to entities in which the bank holds a major stake.
The industry will be given a two-year grace period to make the appropriate adjustments for compliance with the revised section 29.
Introduction of an asset maintenance regime
MAS' liberalisation measures in the last few years have brought about greater foreign bank participation in our banking sector.
While the competition has added to the dynamism of the banking sector, the banking system will increasingly be exposed to risks arising from the foreign banks' international operations.
Should a foreign bank fail, the resolution of a cross-border bank insolvency will be complex and drawn-out. The claims of depositors and creditors will be subject to substantial uncertainty.
The revised section 40 aims to strengthen the foreign bank regulatory framework by requiring foreign full and wholesale bank branches to maintain a minimum level of eligible assets in Singapore in proportion to their deposit liabilities.
This would help to improve the recovery of assets from a failed foreign bank branch in Singapore to meet the claims of Singapore depositors.
The asset maintenance requirement has been carefully calibrated to balance prudential objectives with banks' commercial interests, and determined after close consultation with the industry. A six-month grace period will also be given, for foreign bank branches to make necessary adjustments to their asset allocations.

Source: Media Release 22 Jan 2007

Related Article:
- Banking (Amendment) Bill - First Reading in Parliament

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