## 1sgpea2019001 - EXECUTIVE SUMMARY ## Source details **Canonical URL:** [1sgpea2019001 - EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2019/1sgpea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1sgpea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1sgpea2019001.pdf.json) --- ### Executive summary: systemic exposure and resilience - Singapore is exposed to regional and global shocks: "Global and regional shocks, such as a decline in growth in key emerging markets or heightened volatility in global capital markets, would have a significant effect on banks in Singapore and the rest of the financial system." - Financial stability in Singapore is a regional public good given the size and interconnectedness of the financial system, especially with the rest of Asia. - Strong buffers and policy framework: - "A credible macroeconomic policy framework, robust public finances, and ample international reserves." - The Monetary Authority of Singapore (MAS) has used macroprudential policy proactively to suppress emerging threats. - Oversight framework has been strengthened in recent years. - Progress since the 2013 FSAP: - MAS clarified mandate via amendments to the MAS Act: "in the event of conflicts between its prudential supervision and development objectives, the former prevails." - Implementation of Basel III capital and liquidity requirements. - Enhancements to crisis resolution and safety nets. - Remaining priorities: - Enhance the resolution framework: extend bail-in powers to senior unsecured creditors, strengthen the MAS’ Resolution Unit, and develop guidelines and playbooks for new resolution tools. - Ensure more resources for oversight of the New MAS Electronic Payments and Book-Entry System (MEPS+). ### Scope of the FSAP - Focus and objectives: - Assess soundness and resilience of Singapore’s financial system with particular focus on cross-border linkages and fintech. - Follow up on 2013 FSAP findings and recommendations and examine risks related to cross-border links and current/prospective financial innovation. - Areas of special attention: - Bank regulation and supervision. - Financial market infrastructures: detailed assessment of MAS’ and MEPS+ compliance with the Principles for Financial Market Infrastructures (PFMI). - Crisis management and resolution. ### Financial hub structure and cross-border links - Financial sector size (2018 snapshots and comparisons to 2013): - Banks: assets equal to about 600 percent of GDP. - Asset management firms: assets under management equal to 701 percent of GDP. - Insurance companies: assets equal to 55 percent of GDP. - Asset management industry: - "Caters mainly to foreign investors and invests primarily outside of Singapore" and "does not appear to be a significant source of domestic systemic risk." - Banks and cross-border exposures: - Share of cross-border lending exposures stands at about 60 percent of total exposure, more than half to emerging Asia. - Bulk of cross-border lending is denominated in U.S. dollars; includes funding from parent banks to foreign branches and loans extended by these to corporates from their country of origin. - Funding composition and intragroup dynamics: - Three-quarters of interbank funding is within banking groups. - Deposits account for about 80 percent of total liabilities of D-SIBs. - Network analysis and spillovers: - Singapore is most exposed to potential inward spillovers from Japan, Hong Kong SAR, and the United States. - Spillovers from Singaporean banks would primarily affect other ASEAN countries. - Equity return volatility: Singapore bank stress correlated with bank stress in China, Hong Kong SAR, and ASEAN. - Domestic unrelated interbank exposures are small. ### Macrofinancial developments and key vulnerabilities - External linkages: - "Singapore is a very open economy and an important global and regional economic and financial hub." - Significant exposure to cross-border spillovers; Singapore can also be a source of contagion to the region. - Liquidity and funding vulnerabilities: - Banks rely mostly on deposits for funding. - "System-wide loan-to -deposit ratio in foreign currency remains high at 128 percent though it has declined for the largest banks." - Foreign currency denominated deposits comprise about 40 percent of D-SIBs’ funding. - U.S. dollar liquidity is vulnerable to stress conditions; FSAP cashflow stress tests confirm vulnerability in U.S. dollar liquidity. - Recommendation: "strengthening banks’ foreign exchange liquidity should be a priority." ### System resilience: solvency and stress testing - Banks: - Major banks exhibit sizeable capital buffers and strong profitability; can absorb sharp increases in credit losses under severe but plausible solvency stress tests. - FSAP solvency stress tests show banks can withstand severe scenarios. - Insurers: - Insurance companies generally have strong capital positions, though stress tests indicate vulnerabilities in parts of the sector. - Overall assessment: - "The main parts of the financial system appear resilient even under adverse scenarios." ### Financial innovation and cyber risk - Fintech landscape: - Singapore is an important hub for financial innovation under MAS guidance. - Fintech developments focus on partnership with existing financial institutions or serving markets outside Singapore. - MAS has "managed to strike a good balance between promoting financial innovation and preserving financial stability, investor protection, and financial integrity." - Supervisory gap: requirement for prenotification of material outsourcing arrangements could be clarified/strengthened when MAS is not satisfied with a bank’s outsourcing risk management. - Cyber risk: - Financial innovation has amplified cyber event risks. - MAS active internationally to reinforce cyber resiliency; 2018 Cybersecurity Act promotes cyber security. - Recommendation: develop a cyber network map that accounts for financial linkages and Information and Communications Technology connections for cyber risk surveillance. ### Policy frameworks and regulatory recommendations (high-level) - Resolution and crisis preparedness: - Establish a core staff within the MAS Resolution Unit (RSU) dedicated to resolution work and over time transfer resolution planning to the RSU. - Expand bail-in scope to include senior unsecured debt securities. - Continue to develop guidelines and playbooks for new resolution tools; train staff and test processes. - Liquidity and payments oversight: - MAS should strengthen U.S. dollar liquidity among D-SIBs. - Devote more resources to oversight and supervision of payment systems, including MEPS+. - Enhance cyber resiliency of the central bank and MEPS+ by: (i) clarifying the role of Chief Cyber Security Officer; and (ii) continuing to strengthen cybersecurity resiliency. - Fintech and outsourcing: - MAS should formalize and clarify its authority to require pre-notification of material outsourcing arrangements where MAS is not satisfied that a bank has managed outsourcing risk adequately. - Cyber surveillance: - Develop a cyber network map that incorporates financial and ICT linkages and use it for cyber risk surveillance. - Timing conventions used in recommendations: - "I-Immediate" is within one year; "NT-near-term" is 1–3 years; "MT-medium-term" is 3–5 years. ### FSAP Key Recommendations (excerpted with timings) - The MAS should strengthen U.S. dollar liquidity among D-SIBs. (¶35) — MT - Establish a core staff within the MAS Resolution Unit (RSU) dedicated to resolution work and over time, transfer resolution planning to the RSU. (¶54) — I - Expand the scope of bail-in to include senior unsecured debt securities. (¶54) — MT - Continue to develop guidelines and playbooks for the new resolution tools. Staff should be trained, and processes tested. (¶54) — I - The MAS should formalize and clarify that it may require pre-notification of material outsourcing arrangements where the MAS is not satisfied that a bank has managed its outsourcing risk adequately. (¶41) — MT - Devote more resources to the oversight and supervision of the payments systems. (¶38) — NT - Enhance the cyber resiliency of the central bank and MEPS+ by: (i) clarifying the role of Chief Cyber Security Officer; and (ii) continuing to strengthen its cybersecurity resiliency. (¶48) — I - Develop a cyber network map that takes into account both financial linkages and Information and Communications Technology connections and use it for cyber risk surveillance. (¶47) — MT ### FX and cross-currency swap market (role, users, vulnerabilities) - Market structure: - FX swaps for shorter maturities (typically under 1 year) and cross-currency swaps for longer maturities (1-30 years). - Most significant users: - Asset managers (hedging of investments) - Bank treasurers (arbitraging funding costs across currencies) - Corporate treasurers (cash flow hedging and funding) - MAS participation: - MAS also participates in the FX swap market as part of its money market operations. - Role and vulnerabilities: - Local banks obtain U.S. dollar funding from corporate deposits, medium-term notes, commercial paper and certificates of deposit and channel structural excess in Singapore dollars to foreign banks in the swap market. - The cost of borrowing U.S. dollars in the international swap market has been higher than direct funding in the U.S. dollar interbank market (negative cross-currency basis for most currencies) and increases for longer maturities. - The premium for borrowing U.S. dollars in the swap market is volatile and widens during funding stress episodes. - Dislocations in the U.S. dollar funding market could be a source of downside risks for Singapore’s major banks. ### Key statistics and empirical findings on USD liquidity and swap market - USD LCR (In percent) 2/: 484074 - HQLA needed for 100% LCR (In billions of Singapore dollars): 88.340.148.2 - HQLA needed for 100% LCR (In percent of GDP): 209 11 - HQLA needed to meet same requirements as all-currency LCR (In billions of Singapore dollars) 3/: 53.040.113.1 - HQLA needed to meet same requirements as all-currency LCR (In percent of GDP): 129 3 - Empirical findings: - Funding costs in the FX swap market are volatile and more expensive at longer maturities. - Transaction volumes declined after the financial crisis and FX swap market liquidity has decreased. - Swap market dislocations are associated with contemporaneous and one-week ahead tail risk of banks; five-year cross-currency basis predictive of near-term downside risk to bank equity value. ### Box 1 — Dollar Funding at Risk (summary) - Deviations from covered interest parity (CIP) are common since the global financial crisis. - Cross-currency basis proxies stress in the FX swap market. - Quantile regressions show a more negative five-year SGD/USD cross-currency basis is associated with a lower value of the left tail of equity returns of Singaporean banks. - The basis predicts near-term (five days ahead) downside risk to bank equity value. - Interpreting causality is not straightforward: measured dollar funding stress indicators may be influenced by liquidity and other market factors. ### Insurance sector and other financial-sector vulnerabilities - Insurance capital and exposures: - Regulatory capital amounted to 247 percent of risk-based capital requirements in 2018. - Large direct life insurers are notably exposed to equities and corporate bonds. - Some three-quarters of the regulatory capital of the four largest insurers comes from accumulated profits that are yet to be shared with policyholders. - Profitability: - Profits have been strong but weighed down by falling asset prices in 2018. - General insurers: - Competition in the general insurance sector has driven down profits recently. ### Households and corporates — transmission channels and resilience - Households: - Total household assets are 446 percent of GDP. - Debt stabilized around 70 percent of GDP. - Average debt-to-income ratio is 2.1. - Liquid financial assets are twice the size of total household debt. - 44 percent of household assets are residential property. - Half of outstanding housing loans are at variable rates. - Highly-leveraged, low-income (less than 10 percent of new borrowers in 2018), and younger owners of private housing are vulnerable under adverse stress. - Corporates: - Corporate debt rose from 104 percent of GDP in 2010 to 148 percent of GDP in 2015Q3 and has been stable since. - Interest Coverage Ratio (ICR) fell from 12 to below four after the global financial crisis but has stabilized recently. - Debt-at-risk has improved since 2015 and currently appears manageable. - Median cash-to-debt ratio is 50 percent. ### Macro buffers mitigating vulnerabilities - Current account surpluses close to 18 percent of GDP in 2018. - Net international investment position equal to 223 percent of GDP. - Decades of fiscal surpluses and substantial government assets managed by Temasek Holdings (Private) Limited and GIC Private Limited. - MAS’ foreign exchange reserves equal to about 79 percent of GDP at end-2018. ### Stress testing approach and scenarios - Coverage: - Households: all recent mortgage borrowers. - Corporates: all firms listed on the Singapore stock exchange. - Banks: seven D-SIB groups (10 banks including branches and subsidiaries), accounting for about 75 percent of resident bank loans to firms and households. - Insurers: four largest insurers by asset size, representing 80 percent of sector assets. - Scenarios: - Adverse scenario 1: large-scale global financial market turmoil. Equity and house prices drop by 40 percent, and short-term interest rates rise by 250 basis points in the first two years. - Adverse scenario 2: major slowdown and macrofinancial stress in China; output gap opens to -12.3 percent under this scenario. - Liquidity tests: - Cashflow-based analysis and an LCR test using customized scenarios. ### Selected scenario projections (Table 8 excerpts) - Real GDP growth rate (In percent), baseline scenario for 2019–2023: 2.9 2.7 2.7 2.6 2.6 2.6 - Adverse scenario 1 GDP path (In percent) for 2019–2023: 2.9-3.1-0.8 4.3 5.2 4.1 - Adverse scenario 2 GDP path (In percent) for 2019–2023: 2.9 -2.5 -3.3 0.5 6.8 6.4 - Output gap (In percent of potential output), adverse scenario 1 for 2019–2023: 0.9 -5.0 -8.4 -7.1 -5.0 -3.8 - Output gap (In percent of potential output), adverse scenario 2 for 2019–2023: 0.9 -4.4 -10.2 -12.3 -8.8 -5.7 - Unemployment rate (In percent), adverse scenario 1 for 2019–2023: 2.9 3.5 5.8 6.2 4.9 3.9 - Interest rate: 3-month SIBOR, baseline scenario for 2019–2023: 1.8 2.3 2.8 2.6 2.6 2.6 - Interest rate: 3-month SIBOR, adverse scenario 1 for 2019–2023: 1.8 3.8 4.3 3.6 2.8 2.3 - Property prices (Change in percent), adverse scenario 1 for 2019–2023: 8.0 -30.0 -15.0 5.0 5.0 5.0 - Exchange rate (SGD/USD, Change in percent), adverse scenario 1 for 2019–2023: 2.0 20.0 5.0 -10.0 -10.0 -5.0 - Commodity prices (Change in percent), adverse scenario 1 for 2019–2023: 31.4 -40.0 -5.0 20.0 20.0 5.0 - Equity prices (Change in percent), adverse scenario 1 for 2019–2023: 1.0 -35.0 -5.0 20.0 15.0 6.7 ### Summary implications from stress testing and market analysis - FX swap market dislocations (more negative cross-currency basis, wider bid-ask spreads) are linked to contemporaneous and near-term downside risk in bank equity returns. - Banks and insurers face funding and market-risk channels from global financial conditions; liquidity buffers and HQLA needs relative to USD LCR requirements highlight potential vulnerabilities. - Households and corporates are generally resilient, but segments (e.g., highly-leveraged private-housing borrowers; corporates in construction and transport) warrant monitoring. - Large macro-financial buffers (current account surplus, NIIP, sovereign wealth funds, and FX reserves) materially mitigate systemic vulnerabilities. ### Banking sector: solvency, liquidity, and concentration outcomes - Solvency stress test results: - D-SIBs would experience significant credit losses but remain resilient under the two adverse scenarios. - Credit losses would amount to 2.6 percent and 4.1 percent of risk-weighted assets in scenario 1 and 2. - D-SIBs (excluding foreign branches) would all maintain risk-based capital ratios above regulatory minima. - Leverage: local D-SIBs’ leverage ratios show similar resilience. - Liquidity stress tests: - Cashflow-based tests show broadly adequate liquidity in all currencies and in Singapore dollars but vulnerabilities in specific banks and at longer maturities. - Several D-SIBs would have insufficient liquid U.S. dollar assets to withstand one-week and three-month stresses. - Failures lead to system-wide shortfalls equal to 8-10 percent of GDP in the short run and 11 percent of GDP after the first three months under a longer scenario. - Asset-weighted average U.S. dollar LCR of D-SIBs is low at 48 percent (entity level); shortfall of liquid U.S. dollar assets (relative to a 100 percent LCR) of some 20 percent of GDP. - Concentration risk: - D-SIBs have manageable concentration risk due to diversified loan portfolios; simultaneous default of the top-10 largest borrowers is within buffers. ### Insurance sector: stress tests and exposures - Solvency findings: - Insurers have significant capital buffers in excess of minimum requirements. - Two out of the four largest direct life/composite insurers breached minimum capital adequacy requirements in top-down stress tests. - Four out of five smaller direct life/composite insurers breached minimum capital adequacy requirements in bottom-up stress tests. - Combined post-stress capital shortfalls at the four largest insurers amount to just 1.3 percent of GDP. - Cyber exposures for insurers: - Estimated claims if ten largest affirmative cyber coverage clients and ten largest Property & Casualty clients were victims of cyberattacks amount to SGD 1.8 billion. - Net losses reduce aggregate capital adequacy ratio of these insurers by 3 and 2 percentage points for affirmative and silent cyber coverage, respectively. - General insurers: - All fifteen direct general insurers remain well-capitalized under both adverse scenarios. - Bottom-up stress test on extreme flooding shows limited effect after reinsurance recoveries. ### Financial innovation, fintech, and crypto-assets - MAS commitment: - Government “Smart Nation Initiative”; MAS committed about US$170 million to promote fintech. - Fintech impacts: - Most fintech activity targets markets outside Singapore or helps incumbents deliver more cost-effective services. - Hypothetical scenario: if banks lose all income from transaction and payment services and wealth management due to fintech competition, D-SIBs would experience 2 percentage points of capital impairment over the stress test horizon. - Crypto-exchanges trading payment tokens exist; enactment of the Payment Services Act (PS Act) in February 2019 may increase activity. - Financial institutions have been conservative on crypto-asset investments; crypto-asset investments by Singaporean investors are relatively limited. - Main risks from fintech: - Operational and technology-related risks from reliance on third-party service providers and legacy systems. - Financial integrity risks and reputational risk to MAS from crypto-asset expansion. - Policy recommendations: - Monitor and contain reputational risk from regulatory sandbox; ensure AML/CFT compliance by participants. - Enhance investor education on differing regulatory frameworks for digital tokens. - Prepare to apply cross-organizational supervisory approach over expanding crypto-exchange sector and expand regulatory reach if warranted. ### Cyber risk — findings and recommendations - Findings: - Digitalization has raised cyber-attack risk; surveys and interviews indicate banks and insurers identify theft of money and disruption of operations as greatest cyber-related risks. - Expected associated losses for banks were expected not to exceed about half of quarterly profits, before management actions. - Some banks do not fully consider loss-of-confidence impacts and contagion spillovers. - Institutional steps: - MAS co-chaired CPMI/IOSCO Working Group on Cyber Resilience; appointed a Board-level Risk Committee member with specialist expertise and a Chief Cyber Security Officer. - Established Cyber Resiliency Framework for MAS-operated Critical Information Infrastructures (CIIs) and a Cyber Security Advisory Panel. - Recommendations: - Develop a cyber network map integrating financial exposures and ICT interdependences to identify interconnectedness, potential risk concentrations, and common dependencies. - Clarify role and reporting line of the Chief Cyber Security Officer for MEPS+; consider a full-time CCSO if warranted. - Enhance enterprise-level cyber resiliency with mandatory information security awareness training and regular course completion for all MAS staff. ### Policy frameworks: FMIs, payments, and resources - FMIs: - FMIs have continued to operate safely and efficiently since 2013 FSAP. - MAS actions: privately-operated securities settlement system moved Singapore dollar settlements to MAS in December 2018; two additional central counterparties and one trade repository entered the landscape. - MAS signed supervisory cooperation on crisis management arrangements with U.S. authorities. - Payments oversight and MEPS+: - Payment and Settlement Systems (Finality and Netting) Act amended in 2018. - PS Act signed into law in February 2019 to address new activities and risks in payments. - Finding: MAS payments supervision seems stretched and should receive more resources. - Recommendation: increase resources for oversight and supervision of payment systems and support detailed annual assessment of MEPS+ and other payment systems. - MEPS+ PFMI assessment: most principles observed but opportunities for improvement, notably on operational risk. - MAS response (MEPS+ PFMI engagement): - MAS will review clarity of CCSO role, apply ratings in annual self-attestations by MEPS+ critical service providers, ensure external audits against standards, monitor participants’ compliance with SWIFT Customer Security Program, and review disclosure of additional information on system availability, average daily liquidity, and throughput time. ### Crisis management, resolution, and safety nets - Framework status: - Strengthened since 2013 FSAP and broadly adequate. - MAS is the designated resolution authority; 2017 MAS Act amendments strengthened resolution powers. - MAS conducts individual and inter-institutional exercises and has mechanisms to provide back-stop liquidity. - Areas for enhancement: - Extend bail-in power to cover unsecured senior creditors to align with international best practices. - Resolution functions divided between supervisory units and a newly created Resolution Unit; recommend dedicated core staff for the Resolution Unit. - Operationalize resolution plans by clarifying procedures, sequencing, and timelines. - Funding and liquidity: - Resolution Fund initially financed with public resources. - Recommendation: provide clearer guidance on conditions and pace of recovery of public funds. - Resolution Fund can provide temporary liquidity to banks in resolution; restructured entities should have access to central bank liquidity facilities as quickly as possible. ### Financial integrity (AML/CFT) - Assessment and vulnerabilities: - 2016 joint FATF and Asia Pacific Group Mutual Evaluation Report found AML/CFT efforts highly coordinated and sophisticated but identified vulnerabilities. - Vulnerabilities: need to improve understanding of transnational ML/TF threats; beneficial ownership information may not be available on a timely basis for all entity types and arrangements. - Developments and measures: - March 2017: formation of Risk and Typologies Inter-agency Group (RTIG). - RTIG complemented by government-industry partnership to discuss transnational finance risks. - As of March 2017, companies and limited liability partnerships required to maintain registers of their beneficial owners. - As of July 2017, all outstanding bearer shares not converted to nominal shares were cancelled. - Priority actions: - Better understand and mitigate transnational ML/TF risks and specific risks associated with legal persons and arrangements formed or administered in Singapore. - Continue to closely monitor the trust and company services sector. ### Appendix I — Status of Key Recommendations of 2013 FSAP (selected) - Implemented: - 1. Increased attention to onsite inspections of banks’ credit risk. - 2. Monitor LCR ratios for significant foreign currencies. - 3. Mitigate legal risks to CCPs from conflicts of law across jurisdictions. - 4. CCPs to explore widening collateral pool and feasibility of receiving Singapore government securities as collateral. - 6. Encourage over-extended households to reduce their leverage. - 7. Stand ready to adjust macroprudential measures in the housing market. - 8. Further strengthen banks’ capital framework, including countercyclical capital buffer. - 9. Further develop SGX recovery plans. - 11. Formalize bilateral cooperative crisis management agreements for FMIs. - 12. Collect more granular data on household balance sheets. - 13. Authorize SDIC to provide support for transfer of deposit liabilities. - 14. Ensure banking industry contributes to costs of bank failures. - 15. Further facilitate cross-border cooperation in bank resolution. - 17. Ensure that MAS’ prudential supervision mandate is not compromised by developmental mandate. - Not implemented: - 5. Consider subjecting loans for owner-occupied housing to a limit to be set by the MAS. - 10. Upgrade collateral covering credit exposures related to link with the Chicago Mercantile Exchange (CME). - 16. Consider changes to structure of the MAS Board to strengthen operational independence in financial supervision. - 18. Review and strengthen the resolution framework to enhance MAS' operational independence in bank resolution. ### Methodology (overview for stress tests, FMIs, and interconnectedness) - Insurer stress testing framework: - Projection of regulatory capital position under several scenarios; static balance sheet approach; satellite model to estimate government bond price impacts where yield curves not agreed. - Scenario horizons: macroeconomic scenarios with 2.5-year horizon; non-macroeconomic scenarios with one-year horizon. - Climate-related scenario for general insurers: two-year horizon based on combined impact of 2019 and 2020 under "Scenario 1". - Cyber risk scenario for general insurers: two-year horizon based on combined impact of 2019 and 2020 under "Scenario 1". - Buffers: regulatory capital in excess of regulatory capital requirements; insurers may recognize future profits as buffers. - Regulatory standards: current RBC regulations ("RBC 1"); stress tests use a hurdle Capital Adequacy Ratio of 100 percent. - Financial system interconnectedness methodology: - Institutional perimeter: interbank network includes all banking groups (119); common exposure: all seven D-SIBs; intra-financial network: 8 groups; cross-border network: selected countries. - Starting position: 2018Q2; supervisory and market data. - Methods: interbank — Espinosa-Vega and Solé (2010); common exposure — balance sheet approach; intra-financial network — Steady-state Markov Chain probability; cross-border network — Espinosa-Vega and Solé (2010) and Diebold and Yilmaz (2015). - Outputs: network charts, indices of vulnerabilities, system-wide capital shortfalls, bilateral exposure matrices, heatmaps of bank distress, and spillover charts. _International Monetary Fund. EXECUTIVE SUMMARY (from 1sgpea2019001)_ ### EXECUTIVE SUMMARY __________________________________________________________________________ 6 ### 1sgpea2019001 - EXECUTIVE SUMMARY ### Executive summary: systemic exposure and resilience - As a financial center, Singapore is exposed to regional and global shocks; "Global and regional shocks, such as a decline in growth in key emerging markets or heightened volatility in global capital markets, would have a significant effect on banks in Singapore and the rest of the financial system." - Financial stability in Singapore is a regional public good given the size and interconnectedness of the financial system, especially with the rest of Asia. - Strong buffers and policy framework: - "A credible macroeconomic policy framework, robust public finances, and ample international reserves" are important buffers. - The Monetary Authority of Singapore (MAS) has used macroprudential policy proactively to suppress emerging threats. - The oversight framework has been strengthened in recent years. - Progress since the 2013 FSAP: - MAS clarified its mandate via amendments to the MAS Act: "in the event of conflicts between its prudential supervision and development objectives, the former prevails." - Implementation of Basel III capital and liquidity requirements. - Enhancements to crisis resolution and safety nets. - Remaining priorities: - Enhance the resolution framework: extend bail-in powers to senior unsecured creditors, strengthen the MAS’ Resolution Unit, and develop guidelines and playbooks for new resolution tools. - Ensure more resources for oversight of the New MAS Electronic Payments and Book-Entry System (MEPS+). ### Scope of the FSAP - Focus and objectives: - The 2019 FSAP assesses soundness and resilience of Singapore’s financial system with particular focus on cross-border linkages and fintech. - It follows up on 2013 FSAP findings and recommendations and examines risks related to cross-border links and current/prospective financial innovation. - Areas of special attention: - Bank regulation and supervision. - Financial market infrastructures: detailed assessment of MAS’ and MEPS+ compliance with the Principles for Financial Market Infrastructures (PFMI). - Crisis management and resolution. ### A financial hub in Asia — structure and cross-border links - Financial sector composition (2018 snapshots and comparisons to 2013): - Banks: assets equal to about 600 percent of GDP. - Asset management firms: assets under management equal to 701 percent of GDP. - Insurance companies: assets equal to 55 percent of GDP. - Asset management industry: - "Caters mainly to foreign investors and invests primarily outside of Singapore" and "does not appear to be a significant source of domestic systemic risk." - Banks and cross-border exposures: - Share of cross-border lending exposures stands at about 60 percent of total exposure, more than half of which is to emerging Asia. - Bulk of cross-border lending is denominated in U.S. dollars; some includes funding from parent banks to foreign branches and loans extended by these to corporates from their country of origin. - Funding composition and intragroup dynamics: - Three-quarters of interbank funding is within banking groups, reflecting the large presence of foreign subsidiaries and branches. - Intragroup funding has acted as a stabilizing factor for some foreign branches and subsidiaries during past crises. - Deposits account for about 80 percent of total liabilities of D-SIBs. - Network analysis and spillovers: - Singapore is most exposed to potential inward spillovers from Japan, Hong Kong SAR, and the United States. - Spillovers from Singaporean banks would primarily affect other ASEAN countries. - Equity return volatility analysis indicates Singapore bank stress is correlated with bank stress in China, Hong Kong SAR, and ASEAN. - Domestic unrelated interbank exposures are small. ### Macrofinancial developments and key vulnerabilities - External linkages: - "Singapore is a very open economy and an important global and regional economic and financial hub." - Significant exposure to cross-border spillovers; Singapore can also be a source of contagion to the region. - Liquidity and funding vulnerabilities: - Banks rely prudently mostly on deposits for funding. - "System-wide loan-to -deposit ratio in foreign currency remains high at 128 percent though it has declined for the largest banks." - Foreign currency denominated deposits comprise about 40 percent of D-SIBs’ funding. - U.S. dollar liquidity is vulnerable to stress conditions. - FSAP cashflow stress tests confirm vulnerability in U.S. dollar liquidity. - Given importance of dollar funding and liquidity, "strengthening banks’ foreign exchange liquidity should be a priority." ### System resilience: solvency and stress testing - Banks: - Major banks exhibit sizeable capital buffers and strong profitability, allowing absorption of sharp increases in credit losses under severe but plausible solvency stress tests. - FSAP solvency stress tests show banks can withstand severe scenarios (see "Stress Test of Banks and Insurers" and "Bank Solvency Stress Test Results" referenced in source). - Insurers: - Insurance companies generally have strong capital positions, though stress tests indicate vulnerabilities in parts of the sector. - Overall assessment: - "The main parts of the financial system appear resilient even under adverse scenarios." ### Financial innovation and cyber risk - Fintech landscape: - Singapore has become an important hub for financial innovation under MAS guidance. - Fintech developments have focused on partnership with existing financial institutions or serving markets outside Singapore. - MAS has "managed to strike a good balance between promoting financial innovation and preserving financial stability, investor protection, and financial integrity." - Ongoing challenge: maintaining balance to minimize potential reputational risk. - Specific supervisory gap: the requirement for prenotification of material outsourcing arrangements could be clarified/strengthened when MAS is not satisfied with a bank’s outsourcing risk management. - Cyber risk: - Financial innovation has amplified cyber event risks. - MAS is active internationally to reinforce cyber resiliency. - The 2018 Cybersecurity Act promotes cyber security. - All banks are taking steps to strengthen computer systems. - Recommendations include developing a cyber network map that accounts for financial linkages and Information and Communications Technology connections for cyber risk surveillance. ### Policy frameworks and regulatory recommendations (high-level) - Resolution and crisis preparedness: - Establish a core staff within the MAS Resolution Unit (RSU) dedicated to resolution work and over time transfer resolution planning to the RSU. - Expand bail-in scope to include senior unsecured debt securities. - Continue to develop guidelines and playbooks for new resolution tools; train staff and test processes. - Liquidity and payments oversight: - MAS should strengthen U.S. dollar liquidity among D-SIBs. - Devote more resources to oversight and supervision of payment systems, including MEPS+. - Enhance cyber resiliency of the central bank and MEPS+ by: (i) clarifying the role of Chief Cyber Security Officer; and (ii) continuing to strengthen cybersecurity resiliency. - Fintech and outsourcing: - MAS should formalize and clarify its authority to require pre-notification of material outsourcing arrangements where MAS is not satisfied that a bank has managed outsourcing risk adequately. - Cyber surveillance: - Develop a cyber network map that incorporates financial and ICT linkages and use it for cyber risk surveillance. - Timing conventions used in recommendations: - "I-Immediate" is within one year; "NT-near-term" is 1–3 years; "MT-medium-term" is 3–5 years. ### FSAP Key Recommendations (excerpted with timings) - The MAS should strengthen U.S. dollar liquidity among D-SIBs. (¶35) — MT - Establish a core staff within the MAS Resolution Unit (RSU) dedicated to resolution work and over time, transfer resolution planning to the RSU. (¶54) — I - Expand the scope of bail-in to include senior unsecured debt securities. (¶54) — MT - Continue to develop guidelines and playbooks for the new resolution tools. Staff should be trained, and processes tested. (¶54) — I - The MAS should formalize and clarify that it may require pre-notification of material outsourcing arrangements where the MAS is not satisfied that a bank has managed its outsourcing risk adequately. (¶41) — MT - Devote more resources to the oversight and supervision of the payments systems. (¶38) — NT - Enhance the cyber resiliency of the central bank and MEPS+ by: (i) clarifying the role of Chief Cyber Security Officer; and (ii) continuing to strengthen its cybersecurity resiliency. (¶48) — I - Develop a cyber network map that takes into account both financial linkages and Information and Communications Technology connections and use it for cyber risk surveillance. (¶47) — MT _International Monetary Fund. EXECUTIVE SUMMARY (from 1sgpea2019001)_ ### 4. Singapore’s large currency swap market is an important link between Singapore and ### 4. Singapore’s large currency swap market is an important link between Singapore and the global financial system ### FX and cross-currency swap market structure and users - The swap market consists of foreign exchange (FX) swaps for shorter maturities (typically under 1 year) and cross-currency swaps for longer maturities (1-30 years). - Most significant users: - Asset managers (hedging of investments) - Bank treasurers (arbitraging funding costs across currencies) - Corporate treasurers (cash flow hedging and funding) - The MAS also participates in the FX swap market as part of its money market operations. ### Banking sector structure and business models - Composition: - Three large local banking groups (all designated as D-SIBs in 2015) - Four large foreign banking groups (the seven groups were designated as D-SIBs by the MAS in 2015) - Numerous smaller regional offices for global banks - Business model distinctions: - Local banks (all D-SIBs): full range of retail and institutional banking; growing wealth management business. - Foreign banks: - Branches: use corporate deposits and intra-group funding to lend to non-financial corporates and provide regional treasury and wealth management services. - Subsidiaries: focus on local retail banking. - Foreign banks account for half of total financial sector assets. ### Recent macrofinancial developments and outlook - Growth dynamics: - Economic growth slowed in 2015-16 due to trade and global growth slowdown and lower oil prices. - Strong cyclical upswing in 2017: real GDP growth reached 3.7 percent and inflation edged up. - Moderation in GDP growth in 2018 due to slowing external demand and tighter monetary and macroprudential policy. - Growth projection: Growth is expected to slow to 2.0 percent in 2019 closing the positive output gap. - Inflation: Inflation is likely to remain modest; MAS core inflation noted below 2 percent in text and figures. - Key historical indicators (selected entries from Table 3 and projections): - Real GDP (growth, percent change): 2013: 4.8; 2014: 3.9; 2015: 2.9; 2016: 3.0; 2017: 3.7; 2018: 3.1; 2019: 2.0; 2020: 2.3 - CPI inflation (period average, percent): 2013: 2.4; 2014: 1.0; 2015: -0.5; 2016: -0.5; 2017: 0.6; 2018: 0.4; 2019: 1.0; 2020: 1.3 - MAS core inflation (period average, percent): entries include 1.7; 1.9; 0.5; 0.9; 1.5; 1.7; 1.5; 1.7 (as presented) - Credit to private sector (end of period, percent change): 2013: 15.5; 2014: 7.0; 2015: 2.5; 2016: 5.5; 2017: 3.6; 2018: 4.9; 2019: 2.0; 2020: 2.3 - Current account balance (percent of GDP): 2013: 15.7; 2014: 18.0; 2015: 17.2; 2016: 17.5; 2017: 16.4; 2018: 17.9; 2019: 15.8; 2020: 15.8 - Gross official reserves (US$ billions): 2013: 273.1; 2014: 256.9; 2015: 247.7; 2016: 246.6; 2017: 279.9; 2018: 287.7; 2019: 260.9; 2020: 270.9 - Note: The projections for official reserves for 2019 and onward reflect the transfer of S$ 45 billion to GIC Pte. Ltd. as announced in May 8, 2019. - Credit and output gap: - End-2018 data: no sign of excessive credit growth; credit growth has eased and the credit gap has closed to 1.5 percent of GDP. - Domestic credit growth has been stable, contributing to stabilization of private sector leverage. ### Policy actions and macroprudential measures - Monetary policy: - MAS tightened monetary policy in April 2018 and again in October 2018. - In April 2019, the MAS decided not to tighten further its monetary policy stance. - Property market and prudential measures: - Property-related measures and prudential measures tightened due to household mortgages exceeding 50 percent of GDP and property sector related loans amounting to 30 percent of banks’ total loans. - Measures include limits on total debt servicing ratios and loan-to-value (LTV) ratios, stamp duties, and supply-side measures. - Private residential prices began to rise rapidly after late 2017, with a 9.1 percent increase, y/y, in 2018Q2. - Authorities responded in July 2018 by raising stamp duties and lowering LTV limits to mute potential build-up of financial risk. - Table 4 highlights key property-related macroprudential measures (selected entries preserved exactly as presented): - Loan-to-Value Ratio 1/ (1st loan granted by financial institutions): From Jul. 2018: 75% (55%); Previous: 80% (60%); From Jul. 2018: 15%; Previous: 20% - 2nd loan granted by financial institutions: From Jul. 2018: 45% (25%); Previous: 50% (30%) - 3rd loan granted by financial institutions: From Jul. 2018: 35% (15%); Previous: 40% (20%) - Mortgage Servicing Ratio for loan for purchase of HDB flat granted by financial institutions: From Jan. 2013: 30% of a borrower's gross income - Total Debt Servicing Ratio (All types of housing and loans): From Mar. 2017: Disapply Total Debt Servicing Ratio to mortgage equity withdrawal loans with loan-to-value ratios of 50% and below; Previous (and all other loans): 60% - Maximum tenure for loan for purchase of private residence granted by financial institutions: From Oct. 2012: 35 years - Seller’s Stamp Duty (Up to 1 year holding period): From Mar. 2017: 12%; Previous: 16% - Additional Buyer’s Stamp Duty 2/ (1st property): From Jul. 2018: 25% to 30%; Previous: 15%; (other residency categories and earlier dates preserved as in Table 4) - Footnotes preserved: 1/ Numbers in parentheses indicate loan-to-value limits for borrowers older than 65 or having loans with a tenure larger than 30 years (25 years, if the property purchased is a Housing and Development Board (HDB) flat). 2/ The Additional Buyer’s Stamp Duty is a residency-based capital flow management (CFM)/macroprudential measure (MPM) based on the Fund’s Institutional View on capital flows. The Singapore 2019 Article IV recommended eliminating residency-based differentiation by unifying rates and then phasing out the measure once systemic risks from the housing market dissipate. ### Financial soundness, capital, and liquidity - Capital and regulatory requirements: - MAS has strengthened bank capital and liquidity requirements in line with Basel III. - Minimum capital requirement includes a total capital requirement of 8 percent and a D-SIB surcharge of 2 percent. - Banks must maintain a capital conservation buffer of 2.5 percent and a counter-cyclical capital buffer. - MAS introduced a minimum leverage ratio of 3 percent for locally incorporated D-SIBs. - Liquidity: minimum Liquidity Coverage Ratio (LCR) and Net Stable Funding Requirements (NSFR) for D-SIBs in all currencies and in Singapore dollars. Other banks can choose to comply with LCR or the minimum liquid asset requirement. - Key financial soundness indicators (Table 5, selected figures preserved exactly): - Regulatory capital to risk-weighted assets (percent): 2013: 16.4; 2014: 15.9; 2015: 15.9; 2016: 16.7; 2017: 17.2; 2018: 16.9 - Core Tier-1 capital to risk-weighted assets (percent): 2013: 13.8; 2014: 13.5; 2015: 13.8; 2016: 14.6; 2017: 15.5; 2018: 15.0 - Leverage ratio of D-SIBs: 2018: 7.2 (earlier entries: --; 7.5; 7.7; 7.8) - Nonperforming loans to gross loans (NPL ratio): 2013: 1.2; 2014: 1.1; 2015: 1.6; 2016: 2.2; 2017: 2.0; 2018: 1.9 - NPL ratio of local banks: 2013: 1.0; 2014: 0.9; 2015: 1.1; 2016: 1.4; 2017: 1.6; 2018: 1.5 - Provisions to unsecured NPLs: 2013: 154.8; 2014: 160.1; 2015: 128.1; 2016: 105.9; 2017: 111.5; 2018: 98.0 - Return on average assets of local banks: 2013: 1.2; 2014: 1.1; 2015: 1.2; 2016: 1.1; 2017: 1.3; 2018: 1.3 - Net interest margin of local banks: 2013: 1.7; 2014: 1.7; 2015: 1.8; 2016: 1.7; 2017: 1.8; 2018: 1.8 - Loan to deposit ratio (system): 2013: 107.0; 2014: 109.1; 2015: 104.4; 2016: 100.6; 2017: 105.6; 2018: 107.6 - Loan to deposit ratio of local banks: 2013: 85.9; 2014: 86.4; 2015: 87.4; 2016: 86.9; 2017: 86.1; 2018: 88.5 - Comparative observations (Figure 5 notes preserved): - Banks’ risk-weighted capitalization is strong (16.9 percent in 2018) and provides a buffer of 7 percentage points that can be used in a stress scenario. - Singapore’s D-SIBs have a leverage ratio of 7.2 percent, higher than the 6 percent average for G-SIBs. - Banks in Singapore enjoy higher stable net interest margins and rising fee and commission income. - NPLs are low for D-SIBs (1.9 percent of total loans) and are adequately provisioned. - Weak spots: legacy exposures to transportation (including oil-related sectors) and manufacturing; relatively high "problem loans" in a few foreign D-SIBs. - Liquidity specifics: - D-SIBs rely on non-bank customer deposits for funding (73 percent). - Funding structure has improved with decline in foreign currency loan-to-deposit ratios until 2015. - Overall bank liquidity is adequate, with strong liquidity in Singapore dollars; D-SIBs have healthy buffers over minimum LCR requirements in all currencies and in Singapore dollars. - Asset-weighted average U.S. dollar LCR of D-SIBs is low at 48 percent (at the entity level), amounting to a shortfall of liquid U.S. dollar assets (relative to a 100 percent LCR) of some 20 percent of GDP. ### Sources of vulnerability and resilience - Main vulnerabilities: - Exposures to regional and global shocks are most relevant (e.g., sharp growth slowdown in China; disorderly normalization of monetary policies in advanced economies). - Given size and cross-border interconnectedness, regional/global shocks could significantly affect Singapore banks and regional financial systems. - Resilience: - Strong policy framework, strengthened capital and liquidity requirements, proactive macroprudential measures (especially property-related), and generally strong bank profitability and provision coverage. - Cross-border asset quality has stabilized as NPL ratios for loans to Malaysia and Indonesia have declined over the past year. - Specific risk concerns: - A growth slowdown in China could trigger credit stress and a rise in NPLs via regional spillovers. - Substantial lending to the property sector (in total about 30 percent of banks’ loans to nonbanks) remains a concentrated exposure, though dampened by macroprudential policy. *Source: IMF staff analysis as presented in the Singapore FSAP chapter.* ### 13. A well-functioning swap market is important for the financial system. Local banks ### 13. A well-functioning swap market is important for the financial system. Local banks ### FX swap market role and vulnerabilities - Local banks obtain U.S. dollar funding from corporate deposits, medium-term notes, commercial paper and certificates of deposit and channel structural excess in Singapore dollars to foreign banks in the swap market. - Foreign subsidiaries and branches attract U.S. dollar corporate deposits from multinational corporations that are often clients of the parent bank in many jurisdictions. - The cost of borrowing U.S. dollars in the international swap market has been higher than direct funding in the U.S. dollar interbank market (negative cross-currency basis for most currencies) and increases for longer maturities. - The premium for borrowing U.S. dollars in the swap market is volatile and widens during funding stress episodes; bid-ask spreads also tend to widen in stress episodes. - Analysis suggests dislocations in the U.S. dollar funding market could be a source of downside risks for Singapore’s major banks, even if causality is not established. ### Key statistics on USD liquidity (as presented) - USD LCR (In percent) 2/: 484074 - HQLA needed for 100% LCR (In billions of Singapore dollars): 88.340.148.2 - HQLA needed for 100% LCR (In percent of GDP): 209 11 - HQLA needed to meet same requirements as all-currency LCR (In billions of Singapore dollars) 3/: 53.040.113.1 - HQLA needed to meet same requirements as all-currency LCR (In percent of GDP): 129 3 - Notes associated with table: - Sources: MAS; and IMF staff calculations. - 1/ This table shows the additional high-quality liquid assets that would be needed to meet hypothetical requirements for projected one-month liquidity in USD. - 2/ Average of USD LCRs at the entity level, weighted by total assets. If we use the country-group level of consolidation for those banks that report it, we obtain a USD LCR of 38 percent for all D-SIBs. - 3/ T his assumes an LCR requirement of 100% for domestic banks and 50% for foreign banks. T he requirements are imposed at the same level of consolidation as those for the all-currency LCR. ### Empirical findings from market indicators - Funding costs in the FX swap market are volatile. - Funding is more expensive at longer maturities (SGD-USD cross-currency basis by maturity shown by maturity tenor series: 1y 3y 5y 10y 15y). - Transaction volumes declined after the financial crisis and FX swap market liquidity has decreased. - Swap market dislocations are associated with contemporaneous and one-week ahead tail risk of banks: - Deviations from CIP-negative basis are related to contemporaneous and one-week ahead bank equity returns at different quantiles; five-year cross-currency basis (demeaned annually) is used; sample 2010 to 2018 at daily frequency. - Solid bars in cited regressions represent statistical significance at 5 percent for the average of coefficients for three Singaporean banks. ### Box 1 — Dollar Funding at Risk (summary) - Deviations from covered interest parity (CIP) are common in foreign exchange and cross-currency swap markets since the global financial crisis. - Violations of CIP arise from supply and demand imbalances between currency pairs related to hedging and funding activities and tighter limits to arbitrage due to regulations since the global financial crisis. - The cross-currency basis proxies stress in the FX swap market—the amount by which the interest paid to borrow one currency by swapping it against another differs from the cost of directly borrowing this currency in the cash market. - Quantile regressions show the SGD/USD cross-currency basis is associated with the lower tail of the distribution of bank equity returns: a more negative five-year SGD/USD cross-currency basis is associated with a lower value of the left tail of equity returns of Singaporean banks. - The basis is predictive about near-term (five days ahead) downside risk to bank equity value, indicating FX derivative market dislocations can forecast high near-term bank return volatility and higher downside risk to bank value. - Interpreting causality is not straightforward: measured dollar funding stress indicators may be influenced by liquidity and other market factors. - Footnotes in Box 1: - 1/ CIP is a no-arbitrage condition that holds that the interest rate differential between currencies in the money markets should equal the differential between the forward and spot exchange rates. - 2/ Banks in Singapore are active in the FX swap market rather than the cross-currency basis swap market. Arbitrage conditions ensure that borrowing costs in these two markets move together. This Box uses data on CIP deviations from cross-currency basis swap prices because they are easier to obtain. - 3/ Bank value is measured by bank equity returns. Stress in the dollar funding market is proxied by the cross-currency basis. ### Insurance sector and other financial-sector vulnerabilities - Insurance companies have strong buffers over minimum capital requirements: regulatory capital amounted to 247 percent of risk-based capital requirements in 2018. - Profits have been strong but were weighed down by falling asset prices in 2018. - Large direct life insurers are notably exposed to equities and corporate bonds, making them vulnerable to falling equity prices and widening credit spreads. - Competition in the general insurance sector has driven down its profits recently. - Some three-quarters of the regulatory capital of the four largest insurers comes from accumulated profits that are yet to be shared with policyholders. ### Household and corporate sectors — transmission channels and resilience - Households: - Total household assets are 446 percent of GDP. - Debt has stabilized around 70 percent of GDP. - The average debt-to-income ratio is 2.1. - Liquid financial assets are twice the size of total household debt. - 44 percent of household assets are residential property. - Half of outstanding housing loans are at variable rates. - A small segment—highly-leveraged, low-income (less than 10 percent of new borrowers in 2018), and younger owners of private housing—would face repayment difficulties under the adverse stress scenario. - Corporates: - Corporate debt rose from 104 percent of GDP in 2010 to 148 percent of GDP in 2015Q3 and has been stable since. - Interest Coverage Ratio (ICR) fell from 12 to below four after the global financial crisis but has stabilized recently. - The share of debt-at-risk (share of debt owed by firms with ICR below one) has improved since 2015 and currently appears manageable. - Corporates have substantial cash buffers with a median cash-to-debt ratio of 50 percent. ### Macro buffers mitigating vulnerabilities - Large current account surpluses (close to 18 percent of GDP in 2018) have led to a net international investment position equal to 223 percent of GDP. - Decades of fiscal surpluses contributed to robust public finances and substantial government assets managed by Temasek Holdings (Private) Limited and GIC Private Limited. - MAS’ foreign exchange reserves equal to about 79 percent of GDP at end-2018 provide another buffer. ### Systemic risk assessment and stress testing approach - FSAP coverage: - Households: stress test covered all recent mortgage borrowers. - Corporates: stress test covered all firms listed on the Singapore stock exchange. - Banks: exercise covered the seven D-SIB groups (a total of 10 banks, including branches and subsidiaries), accounting for about 75 percent of resident bank loans to firms and households. - Insurers: exercise focused on the four largest insurers by asset size, representing 80 percent of sector assets. - Top-down solvency tests cross-checked against MAS top-down tests and institutions’ bottom-up tests; complemented with sensitivity analyses for D-SIBs and attribution analyses for insurers. - Two “severe but plausible” adverse scenarios (Box 2): - Adverse scenario 1: large-scale global financial market turmoil. Equity and house prices drop by 40 percent, and short-term interest rates rise by 250 basis points in the first two years. - Adverse scenario 2: major slowdown and macrofinancial stress in China that affects Singapore directly and indirectly via ASEAN; output gap opens to -12.3 percent under this scenario. - Liquidity stress tests: included cashflow-based analysis and an LCR test using customized scenarios. ### Selected scenario projections (from Table 8) - Real GDP growth rate (In percent), baseline scenario: 2.9 2.7 2.7 2.6 2.6 2.6 for 2019–2023. - Adverse scenario 1 GDP path (In percent): 2.9-3.1-0.8 4.3 5.2 4.1 for 2019–2023. - Adverse scenario 2 GDP path (In percent): 2.9 -2.5 -3.3 0.5 6.8 6.4 for 2019–2023. - Output gap (In percent of potential output), adverse scenario 1: 0.9 -5.0 -8.4 -7.1 -5.0 -3.8 for 2019–2023. - Output gap (In percent of potential output), adverse scenario 2: 0.9 -4.4 -10.2 -12.3 -8.8 -5.7 for 2019–2023. - Unemployment rate (In percent), adverse scenario 1: 2.9 3.5 5.8 6.2 4.9 3.9 for 2019–2023. - Interest rate: 3-month SIBOR, baseline scenario: 1.8 2.3 2.8 2.6 2.6 2.6 for 2019–2023. - Interest rate: 3-month SIBOR, adverse scenario 1: 1.8 3.8 4.3 3.6 2.8 2.3 for 2019–2023. - Property prices (Change in percent), adverse scenario 1: 8.0 -30.0 -15.0 5.0 5.0 5.0 for 2019–2023. - Exchange rate (SGD/USD, Change in percent), adverse scenario 1: 2.0 20.0 5.0 -10.0 -10.0 -5.0 for 2019–2023. - Commodity prices (Change in percent), adverse scenario 1: 31.4 -40.0 -5.0 20.0 20.0 5.0 for 2019–2023. - Equity prices (Change in percent), adverse scenario 1: 1.0 -35.0 -5.0 20.0 15.0 6.7 for 2019–2023. ### Summary implications - FX swap market dislocations (more negative cross-currency basis, wider bid-ask spreads) are linked to contemporaneous and near-term downside risk in bank equity returns, suggesting dollar funding stress can both signal and transmit financial stress. - Banks and insurers face funding and market-risk channels from global financial conditions; liquidity buffers and HQLA needs relative to USD LCR requirements highlight potential vulnerabilities. - Households and corporates are generally resilient, but segments (e.g., highly-leveraged private-housing borrowers; corporates in construction and transport) warrant monitoring. - Large macro-financial buffers (current account surplus, NIIP, sovereign wealth funds, and FX reserves) materially mitigate systemic vulnerabilities. *Source: IMF staff summary of "13. A well-functioning swap market is important for the financial system."* ### 20. As for corporates, their debt-at-risk would rise significantly under the two scenarios, ### 1sgpea2019001 - 20. As for corporates, their debt-at-risk would rise significantly under the two scenarios, ### Corporates: stress impact and buffers - Findings: - Corporates’ debt-at-risk would rise significantly under the two scenarios. - Severe interest and currency shocks, and most of all the earnings shock, would have a sizable impact on firms’ balance sheet (before considering mitigating factors) and significantly raise the debt-at-risk level beyond the levels seen in the global financial crisis, weighing on banks and insurers. - Adverse effects are mitigated by natural foreign currency hedges and ample cash reserves. ### Banking sector: solvency stress test results - Findings: - D-SIBs would experience significant credit losses but nevertheless remain resilient under the two adverse scenarios. - NPL ratios would rise sharply as the scenarios unfold, compounded by a sharp house price decline and exchange rate depreciation. - Credit losses would amount to 2.6 percent and 4.1 percent of risk-weighted assets in scenario 1 and 2. - Thanks to large capital buffers, good asset quality, strong profitability, low NPLs, the D-SIBs (excluding foreign branches) would all maintain risk-based capital ratios above the regulatory minima. - Leverage ratios show similar resilience, suggesting that the calculation of risk-weighted assets of local D-SIBs is suitably conservative. - Top-down and bottom-up stress tests revealed similar resilience. - Sensitivity and concentration risk: - D-SIBs have manageable concentration risk due to diversified loan portfolios. - While concentration risk is relatively higher in one foreign D-SIB, all D-SIBs have enough capital buffers to withstand a simultaneous default of the top-10 largest borrowers. - Liquidity stress tests: - Cashflow-based stress tests show D-SIBs have broadly adequate liquidity in all currencies and in Singapore dollars but point to vulnerabilities in specific banks and at longer maturities. - LCR-based stress tests indicate demand for liquid assets would increase significantly after a stress scenario as banks need to return to compliance with LCR requirements in the medium term. - Cashflow-based test confirms U.S. dollar liquidity is a source of vulnerability: several D-SIBs would have insufficient liquid U.S. dollar assets to withstand one-week and three-month stresses. - These failures lead to system-wide shortfalls equal to 8-10 percent of GDP in the short run and 11 percent of GDP after the first three months under a longer scenario. - Domestic interconnectedness is low while cross-border links are important, making foreign currency liquidity key. - Observed test metrics (as presented in charts): - Liquid assets: long-term scenario (all currencies, S GD, USD) values shown across horizons 01W 2W 3W 1M 3M 6M 1Y 2Y. - Liquid assets: short-term scenario (all currencies, S GD, USD) values shown across horizons 01W 2W. - Long-term stress scenario and short-term stress scenario charts report per-horizon values for all currencies, S GD, USD. ### Insurance sector: solvency and stress tests - Findings: - Insurers do not seem to be a source of systemic risk, although the solvency position of specific direct life insurers is vulnerable to falls in asset prices. - Insurers have significant capital buffers in excess of minimum requirements. - Two out of the four largest direct life/composite insurers breached minimum capital adequacy requirements in the top-down stress tests. - Four out of the five smaller direct life/composite insurers breached minimum capital adequacy requirements in the bottom-up stress tests. - Losses in asset value for direct life insurers are mainly driven by substantial holdings of equities and corporate bonds. - Liability values are relatively less sensitive to market conditions under the current capital framework, resulting in insurers being impacted negatively under a rising yield stress scenario. - Combined post-stress capital shortfalls at the four largest insurers amount to just 1.3 percent of GDP. - General insurers: - All fifteen direct general insurers remain well-capitalized under both adverse scenarios. - Bottom-up stress test on extreme flooding shows limited effect on risk-based capital adequacy ratios after reinsurance recoveries. - Cyber exposures for insurers: - Direct general insurers’ estimated claims if their ten largest affirmative cyber coverage clients and ten largest Property & Casualty clients were victims of cyberattacks amount to SGD 1.8 billion, shared between direct insurers and reinsurers and may be offset against a release of technical reserves. - Net losses reduce the aggregate capital adequacy ratio of these insurers by only 3 and 2 percentage points for affirmative and silent cyber coverage, respectively. ### Financial innovation and fintech - Context: - The government’s “Smart Nation Initiative” aims to digitalize and transform the economy. - The MAS has committed about US$170 million to promote fintech. - Technology adoption can expand financial services and lower the cost of financial intermediation, which has remained steady between 1.5 and 2 percent. - Findings and scenarios: - Most fintech activity in Singapore targets markets outside Singapore or helps incumbents deliver more cost-effective services rather than disrupting existing business models. - Business segments prone to disruption: wealth management, trade finance, and payments. - Hypothetical scenario: if banks lose all income from transaction and payment services and wealth management due to fintech competition, D-SIBs would experience 2 percentage points of capital impairment over the stress test horizon (sizeable but manageable). - Crypto-exchanges trading payment tokens exist and may increase after the Payment Services Act (PS Act) enactment in February 2019; some may expand to securities tokens and crypto-derivatives. - Financial institutions in Singapore have shown a conservative approach to crypto-asset investments; crypto-asset investments by Singaporean investors are relatively limited. - Fintech is unlikely to become a systemic financial risk factor quickly; MAS has powers and flexibility to react to preserve stability, consumer protection, and financial integrity. - Main risks from fintech identified: - Operational and technology-related risks from increased reliance on third-party service providers and legacy systems. - Financial integrity risks and reputational risk to MAS from crypto-asset expansion; prior to the PS Act crypto-assets were unregulated except for securities tokens. - Increased risk taking by incumbent firms as competition or uncertainty around financial innovation evolves. ### Cyber risk - Findings: - Digitalization has raised cyber-attack risk; the FSAP explored cyber-risk via surveys, interviews, data examination, and event-study analysis. - Successful cyber-attacks in the Singapore financial sector so far have not caused significant financial losses. - MAS surveyed 18 banks and 17 direct general/composite insurers on cyber exposures; FSAP team discussed cybersecurity frameworks with seven D-SIBs and four largest insurers. - Banks identify the greatest cyber-related risks as theft of money and disruption of normal operations; expected associated losses are manageable and were expected not to exceed about half of quarterly profits, before management actions. - Banks employ layers of security measures (access controls, encryption, backups, regular testing, continuous monitoring), but some banks do not fully consider loss-of-confidence impacts and contagion spillovers. - Direct insurers expect cyber coverage claims to be manageable (see SGD 1.8 billion exposure and 3 and 2 percentage point CAR impacts above). ### Policy frameworks to ensure a resilient financial system - Financial oversight: overview - The oversight framework is strong and further enhanced since the 2013 FSAP; MAS clarified via amendments to the MAS Act that prudential supervision prevails over development objectives in event of conflict. - MAS plays an active role in promoting, supervising, and regulating fintech developments. - Banking sector policy recommendations: - Capital and liquidity requirements strengthened in line with Basel III. - MAS conducts regular, granular stress tests of bank solvency and liquidity and collects consistent data across reporting banks. - Recommendation: MAS should seek to strengthen D-SIBs’ U.S. dollar liquidity in a timely manner. - Observations: LCR in U.S. dollars is low at about 50 percent for D-SIBs and even lower for the domestic D-SIBs. - Cashflow stress tests confirm vulnerabilities in foreign currency liquidity. - Given importance of dollar funding and liquidity, banks should undertake more self-insurance against liquidity shocks by holding more high-quality liquid assets in U.S. dollars. - MAS has chosen to use the supervisory process to encourage banks to improve foreign currency liquidity positions; this approach has been successful in reducing banks’ reliance on the FX swap market for funding normal U.S. dollar lending activity. - MAS should keep the option to introduce minimum requirements for foreign currency LCRs if improvements are not achieved through supervisory measures. - Any actions should be undertaken gradually to avoid disrupting banking or foreign exchange activity. - Financial market infrastructures (FMIs): - FMIs have continued to operate safely and efficiently since 2013 FSAP. - MAS has implemented actions for capital market FMIs; in December 2018 a privately-operated securities settlement system moved Singapore dollar settlements for equities and debt to settle at MAS. - Two additional central counterparties and one trade repository have entered the FMI landscape. - MAS signed a supervisory cooperation on crisis management arrangements with U.S. authorities. - Payment system safety and resources: - Payment system safety reinforced with legal and regulatory reforms; MAS aims for higher standards than CPSS/IOSCO PFMI minimum. - Payment and Settlement Systems (Finality and Netting) Act amended in 2018 to enhance insolvency protection, designation criteria, and MAS administrative powers. - The PS Act was signed into law in February 2019 to address new activities and risks in the payments landscape. - MAS supervisory expectations require banks to include management of foreign exchange settlement risks in their counterparty risk management frameworks. - Finding and recommendation: The part of MAS that supervises the payment system seems stretched and should receive more resources. - Resources are not commensurate with the broad scope of supervisory responsibilities and the evolving payments landscape. - MAS should increase resources for oversight and supervision of payment systems and to support detailed annual assessment of MEPS+ and other payment systems. - MEPS+ assessment against PFMI finds most principles observed but opportunities for improvement relative to international best practices, notably on operational risk. *Source: IMF staff calculations; content from the IMF FSAP chapter provided in the source PDF.* ### 39. The MAS has so far managed to strike a good balance in its dual role of promoting ### The MAS has so far managed to strike a good balance in its dual role of promoting ### Fintech, regulatory sandbox, and outsourcing - Finding: The MAS has taken a prudent and proactive approach to fintech; this is apparent in how the regulatory sandbox was established and in changes to regulations to ensure they account for fintech developments. - Examples of MAS actions: - Published guidelines on digital advice and standards for third party risk management. - Internally experimented with distributed ledger technology and data analytics. - Concern: A rebalancing seems required in outsourcing. The MAS’ updated outsourcing guidelines no longer require financial institutions to pre-notify the MAS even when they outsource critical functions. - Recommendation regarding sandbox reputational risk: - Monitor and contain potential reputational risk from the regulatory sandbox. - Ensure participants apply full Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) requirements. - Within a risk-based framework, place emphasis on verification of compliance with risk management and other minimum standards (overlaid with a judgement of the residual risks posed) during the experimentation phase. ### Operational risk and supervisory intensity - Observation: Information technology risk is becoming more prominent, evidenced by (i) additional guidance issued on outsourcing and technology risk management, and (ii) organizational change creating the “Technology Risk and Payments Department.” - Recommendations: - Conduct more thematic reviews of operational risk heavy activities across the entire banking sector to benchmark best practices and communicate benchmarking publicly. - Develop a full picture of supervised firms and their Information and Communications Technology systems by mapping financial and technology connections across the sector to identify systemic risks from interconnectedness and concentrations in third party service providers. - Formalize and clarify that the MAS may require pre-notification of material outsourcing arrangements where the MAS is not satisfied that a bank has managed its outsourcing risk adequately. ### Crypto-Assets - Finding: The scope of activities and global nature of Singaporean crypto-exchanges can create reputational risks to the MAS. - Regulatory scope: - MAS’ powers over crypto-services already cover securities tokens. - The new PS Act enhances MAS’ powers over crypto-exchanges trading digital payment tokens but focuses on risks to financial integrity and does not provide the same prudential, investor protection, or market integrity powers as for crypto-exchanges trading securities tokens. - Risks: Crypto-exchange groups typically share technology across affiliated entities; an incident in systems used by Singapore-based exchanges may create reputational risk to the MAS despite MAS primarily regulating the Singapore-based entity for AML/CFT purposes. - MAS action: Plans to continue public education and cautioning on risks of digital tokens and rationale for limiting regulatory ambit to AML/CFT over digital token players during public engagements. - Recommendations if crypto-activities expand: - Further enhance investor education to highlight risks from differing regulatory frameworks for various types of digital token. - Prepare to apply a cross-organizational supervisory approach over the expanding crypto-exchange sector. - Stand ready to expand regulatory reach promptly, if warranted by market and industry developments in digital token services. - AML/CFT alignment: - Finding: Singapore’s AML/CFT approach to digital tokens is broadly in line with the current (and still evolving) FATF standard but requires further adjustments. - Actions encouraged: - Bring custodian wallet service providers within AML/CFT purview. - Ensure AML/CFT framework applies to corporate digital token service providers created in Singapore. - Issue implementing regulations, notices, and guidelines under the PS Act. - Ensure the risk-based approach relies on a sound risk assessment and follow FATF developments related to Virtual Asset Service Providers. ### Cyber risk — overview and institutional framework - Finding: The MAS is at the forefront of international efforts to reinforce cyber resiliency and develop related international guidance. - Evidence: - Co-chaired the CPMI/IOSCO Working Group on Cyber Resilience. - The 2018 Cybersecurity Act promotes cyber security. - Appointed a Board-level Risk Committee member with specialist expertise in technology and cyber risk management and a Chief Cyber Security Officer to senior management. - Established a Cyber Resiliency Framework for MAS-operated Critical Information Infrastructures (CIIs) and a Cyber Security Advisory Panel. - Observation: All financial institutions in Singapore noted concern about cyber threats. - Institutional steps: - Cybersecurity Act of 2018 imposes responsibilities on owners of designated CIIs and defines rules for licensing cybersecurity service providers. - MAS is consulting on minimum regulatory requirements for cyber hygiene and training supervisors to include cybersecurity elements in regular monitoring. ### Surveillance of cyber-risk and MEPS+ - Recommendation: Develop a cyber network map integrating financial exposures and ICT interdependences to identify interconnectedness, potential risk concentrations, and common dependencies. - MEPS+ specific recommendations: - Clarify the role and reporting line of the Chief Cyber Security Officer (a role held concurrently by the Executive Director of the Technology Risk and Payments Department (TRPD)) to ensure independence of TRPD. - Consider if a full-time Chief Cyber Security Officer position is warranted as role, responsibilities, and resource implications evolve. - Enhance enterprise-level cyber resiliency with mandatory information security awareness training and course completion for all MAS staff on a regular basis. ### Macroprudential policy - Finding: The MAS has a strong framework for macroprudential policy and has been proactive in using property-related tools. - Features of framework: - Clear mandate and well-defined objectives. - Dedicated financial stability unit with strong analytical capacity. - Range of communication tools supporting accountability. - International cooperation: - MAS has signed memoranda of understanding with foreign counterparts for information sharing and cooperation. - Holds regular bilateral meetings with regional central banks and participates in international and regional fora. - Reciprocity arrangements with other countries exist given many foreign banks in Singapore and importance of cross-border lending. - Domestic coordination: - Concentration of responsibilities over financial stability in MAS facilitates coordination. - An interagency taskforce on the property market shares data and surveillance insights across the Ministry of Finance, the MAS, and the Ministry of National Development. ### Systemic risk monitoring — data gaps - Finding: MAS has a sophisticated framework for systemic risk monitoring but could improve by closing data gaps. - Improvements already made: Multi-year on-site inspection initiatives, guidance on credit underwriting and credit review, rollout of analytical tools to compare more granular data from banks. - Data gaps identified for further collection: - A more complete set of sectoral financial accounts. - Domestic interlinkages. - Detailed information on the stock of property-related loans to the non-financial private sector at the borrower-level over time. - Household assets by income, linked to household debt. - Insurers’ exposures to collective investment schemes, liability cashflow projection, and net open foreign exchange positions. - Recommendation: Consider alternative approaches to estimating the credit gap, recognizing changes in credit cycles to support timely macroprudential actions. ### Crisis management and resolution, and safety nets - Finding: Framework for crisis management and resolution has been strengthened since the 2013 FSAP and is broadly adequate. - MAS roles and powers: - MAS is the designated resolution authority for the financial sector. - 2017 amendments to the MAS Act strengthened the resolution framework and introduced enhanced resolution powers and strengthened recovery and resolution framework for D-SIBs. - MAS conducts individual and inter-institutional exercises for crisis management and has powers and mechanisms to provide back-stop liquidity. - Areas for enhancement: - Extend bail-in power to cover unsecured senior creditors to align more closely with international best practices. - Resolution functions are divided between supervisory units and a newly created Resolution Unit; recommend a dedicated core staff for the Resolution Unit to take on an expanded role over time. - Operationalize resolution plans by clarifying procedures, sequencing, and timelines. - Funding and liquidity: - Current funding arrangements finance the Resolution Fund initially with public resources. - Recommendation: Provide clearer guidance on conditions and pace of recovery of public funds. - Resolution Fund can provide temporary liquidity to banks in resolution; restructured entities should have access to central bank liquidity facilities as quickly as possible. ### Financial integrity (AML/CFT) - Finding: The 2016 joint FATF and Asia Pacific Group Mutual Evaluation Report (MER) found AML/CFT efforts in Singapore to be highly coordinated and sophisticated with a strong focus on enforcement, but identified vulnerabilities. - Vulnerabilities noted in MER: - Need to improve understanding of transnational ML/TF threats and exploitation of specific vulnerabilities related to private banking and growing asset management industry. - Beneficial ownership information may not be available on a timely basis for all entity types and arrangements. - Developments and measures since MER: - March 2017: Formation of a Risk and Typologies Inter-agency Group (RTIG) to identify new and emerging ML/TF risks. - RTIG complemented by a government-industry partnership to discuss transnational finance risks; identified potential misuse of certain legal entities and arrangements, such as shell companies established by non-residents. - RTIG completing a risk assessment of virtual currencies. - Improved supervision of designated non-financial businesses and professions, including company service providers, with enhanced risk-based supervision and checks on customer identification and records. - As of March 2017, companies and limited liability partnerships are required to maintain registers of their beneficial owners. - As of July 2017, all outstanding bearer shares that had not been converted to nominal shares were cancelled. - Priority actions: - Continue efforts to better understand and mitigate transnational ML/TF risks and specific risks associated with legal persons and arrangements formed or administered in Singapore. - Continue to closely monitor the trust and company services sector. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### Appendix I. Status of Key Recommendations of 2013 FSAP ### Appendix I. Status of Key Recommendations of 2013 FSAP ### Status Summary - The appendix lists 18 recommendations from the 2013 Financial System Stability Assessment (FSSA) and the status update for each recommendation as reported. ### Recommendations and Statuses (No. 1–12) - 1. Increased attention to onsite inspections of banks’ credit risk. — Implemented - 2. Monitor LCR ratios for significant foreign currencies. — Implemented - 3. Mitigate legal risks to CCPs from conflicts of law across jurisdictions. — Implemented - 4. The CCPs to explore with members the possibility of widening their collateral pool and examine the feasibility of receiving Singapore government securities as collateral to improve access to central bank liquidity in times of stress. — Implemented - 5. Consider subjecting loans for owner-occupied housing to a limit to be set by the MAS. — Not implemented - 6. Encourage over-extended households to reduce their leverage. — Implemented - 7. Stand ready to adjust macroprudential measures in the housing market in line with changes in market conditions. — Implemented - 8. Further strengthen banks’ capital framework, with implementation of the countercyclical capital buffer in line with the Basel III timelines. — Implemented - 9. Further develop SGX recovery plans, identifying additional scenarios. — Implemented - 10. Upgrade the collateral that covers credit exposures related to the link with the Chicago Mercantile Exchange (CME). — Not implemented - 11. Formalize bilateral cooperative crisis management agreements for FMIs. — Implemented - 12. Collect more granular data on household balance sheets, drawing on surveys and strengthened credit bureau practices. — Implemented ### Recommendations and Statuses (No. 13–18) - 13. Authorize the Singapore Deposit Insurance Corporation (SDIC) to provide support, on a least-cost basis, for the transfer of deposit liabilities to a bridge bank or healthy institution. — Implemented - 14. Ensure that the banking industry adequately contributes to the costs of bank failures. — Implemented - 15. Further facilitate cross-border cooperation in bank resolution. — Implemented - 16. Consider changes to the structure of the MAS Board to strengthen operational independence in financial supervision. — Not implemented - 17. Ensure that the MAS’ mandate for prudential supervision is not compromised by its developmental mandate. — Implemented - 18. Review and strengthen the resolution framework to enhance the MAS' operational independence in bank resolution. — Not implemented *Source: Appendix I. Status of Key Recommendations of 2013 FSAP* ### 10. MAS welcomes the IMF’s assessment of Singapore’s systemically important payment ### 10. MAS welcomes the IMF’s assessment of Singapore’s systemically important payment system and authorities’ responsibilities against the PFMI ### Governance (Principle 2) - MAS welcomes the IMF’s assessment and expresses appreciation for the constructive dialogue and assessment. - IMF observation: the CCSO is a member of the CIIC, and the CCSO role is concurrently held by the Executive Director of TRPD, which is the overseer and supervisor of MEPS+. - MAS position: - At the time of appointment of CCSO in October 2017, Executive Director of TRPD was assessed to be the most qualified person for the CCSO role. - MAS is of the view that there is no material conflict of interest as CCSO advises CIIC on adequacy and appropriateness of MEPS+’s cyber security arrangements and is not responsible for MEPS+ operations. - MAS will review the need for greater clarity of the CCSO role to more fully achieve the separation of operational and oversight responsibilities over MEPS+. ### Comprehensive risk management framework (Principle 3) - MAS agrees with IMF’s observation on the potential adoption of DLT by FMIs in the near to medium term and its potential risks to MEPS+. - MAS action: - MAS will review and analyze the potential implications of DLT on the safety of MEPS+ against the CPMI analytical framework for distributed ledger technology in payment, clearing and settlement before it makes the decision, to either adopt DLT for MEPS+ or interface DLT-based systems with MEPS+. ### Operational Risk (Principle 17) - IMF observation: MAS is undertaking ongoing efforts to manage potential operational risks from cyber risks, including expanding surveillance coverage, reinforcing protection capabilities, reducing time to recover, and developing cyber competencies; assessors observed areas for improvement in information and cyber security training to staff, oversight of MEPS+ critical service providers and monitoring of MEPS+ participants’ end-point security. - MAS responses and commitments: - Enterprise-level information security: - MAS agrees it is critical for all MAS staff to be cyber vigilant. - All staff are apprised of latest developments through regular advisories. - All staff are required to complete a mandatory information security e-learning module and pass the accompanying assessment test. - The mandatory e-learning module will be continually updated to reflect the evolving information security threat and risk landscape. - Additional initiatives will be explored, including the conduct of more frequent phishing exercises. - Oversight of MEPS+ critical service providers: - MAS agrees to apply ratings in the annual self-attestations submitted by the MEPS+ critical service providers that support the continuation of critical services for MEPS+. - All external audits will be completed against acceptable national or international standards. - MEPS+ participants’ end-point security: - MAS agrees to monitor the compliance of MEPS+ participants with the mandatory controls of the SWIFT Customer Security Program and ensure that the participants’ self-attestations are audited. ### Disclosure of rules, key procedures and market data (Principle 23) - IMF observation: MEPS+ has met the disclosure requirements in Principle 23; assessors compared disclosure to international best practices on extent of disclosure. - MAS action: - MAS will review IMF’s recommendation on the disclosure of additional information on material developments and quantitative indicators on: - system availability, - average daily liquidity, and - throughput time - The review concerns the MEPS+ PFMI Disclosure that is published on the MAS website. ### Regulatory, Supervisory, and Oversight Powers and Resources (Responsibility B) - MAS agrees that, in light of the evolving payments landscape, it is timely to review the resource requirements for the supervision of payment systems. ### Disclosure of Policies with Respect to FMIs (Responsibility C) - Responsibility C observation: does not require overseers to publicly disclose results of their independent assessment or publish a consolidated report on FMIs. - MAS position and actions: - MAS acknowledges that publication of the overseer’s assessment of MEPS+ will enhance accountability to the public given that MEPS+ is also operated by MAS. - MAS will discuss the frequency of disclosure, the forum to endorse the report and the form in which such information would be best presented. - MAS notes it publicly discloses important developments on FMIs supervised by MAS on a regular basis through press releases, speeches and public documents and is of the view that the current approach is adequate for transparency of MAS’ responsibilities over FMIs. ### Application of the Principles for FMIs (Responsibility D) - MAS agrees with IMF’s recommendation to revise the Monograph on Supervision of FMIs to: - describe the standards used for designated system-wide important payment systems and - describe the associated risks which are assessed relative to the PFMI. - MAS will also annually assess the need to apply the PFMI to system-wide important payment system. *Source: 1sgpea2019001 - 10. MAS welcomes the IMF’s assessment of Singapore’s systemically important payment system and authorities’ responsibilities against the PFMI* ### 2. Methodology ### 2. Methodology ### Overall framework - Projection of the regulatory capital position under several scenarios - Each insurer’s own internal methodology - Projection of the regulatory capital position under a severe yet plausible macroeconomic stress scenario - The capital position will be modelled by revaluing assets and liabilities under the scenario - Static balance sheet approach, where the impact of the entire scenario is evaluated in one step - A satellite model will be used to estimate the impact on government bond prices by maturity, for those currencies where yield curves are not agreed under the bank solvency scenario ### Type of analyses (Scenario analysis) - There will be macroeconomic and non-macroeconomic scenarios. The macroeconomic scenarios have horizons of 2.5 years and the non-macroeconomic scenarios have horizons of one year. - There will be three macroeconomic scenarios, matching the baseline and two adverse scenarios used under the bank solvency stress tests above. - One climate-related scenario tests the impact on general insurers of severe but plausible rainfall. - There will be one adverse scenario only. - The scenario will have a two-year horizon, based on the combined impact of 2019 and 2020 under “Scenario 1” of the agreed bank solvency scenarios. - Risk-free discount rates under the adverse scenario will follow the Singapore regulatory regime, where longer-term discount rates are based on the average of historical Singapore Government bond yields (since inception) and hence are less sensitive to interest rate movements. - A cyber risk scenario tests the impact on general insurers of claims on direct (affirmative) and indirect (silent) cyber insurance policies. - There will be one adverse scenario only. - The scenario will have a two-year horizon, based on the combined impact of 2019 and 2020 under “Scenario 1” of the agreed bank solvency scenarios. - Risk-free discount rates under the adverse scenario will follow the Singapore regulatory regime, where longer-term discount rates are based on the average of historical Singapore Government bond yields (since inception) and hence are less sensitive to interest rate movements. ### Risks and Buffers - Risks - Falls in asset prices, possibly due to fire sales (“market risk”) - Catastrophe risk - Cyber risk - Falls in asset prices, possibly due to fire sales (“market risk”) will be modelled in more detail than in the bank solvency stress tests - Default by largest counterparties - Buffers - Buffers are as specified in the top-down analyses to the right. - In addition, insurers may recognize future profits as buffers (e.g., coupon income from corporate bond holdings during the stressed period). - Insurers also model the effects of their recovery plans on their regulatory capital positions. - The buffers are regulatory capital in excess of regulatory capital requirements. - The fall in asset values will result in an automatic relaxation of capital requirements for market risk. - Falls in liability values, due to rising sovereign yields, will also improve the solvency position. ### Regulatory Standards - Current RBC regulations (“RBC 1”). - Insurers specify hurdle rates according to their internal targets, which are higher than the minimum regulatory requirement. - Insurers’ own regulatory requirements include industry-wide and firm-specific requirements. - The stress tests will use a hurdle Capital Adequacy Ratio based on confidential, insurer-specific capital requirements. - The stress tests will use a hurdle Capital Adequacy Ratio of 100 percent. - In addition, a higher Capital Adequacy Ratio will be considered, based on an indicative and confidential capital surcharge for high-impact insurers. However, such quantitative results will not be published, to maintain confidentiality. ### Reporting Format for Output presentation - The FSAP team will have access to a summary of insurers’ stress test results. - Attribution analysis will assist in identifying the drivers of risk. - As much sector-wide detail as possible will be disclosed, while preserving insurer—supervisor confidentiality. - Sector-wide regulatory capital position and capital shortfall. ### Financial System: Interconnectedness Analysis — Institutional Perimeter - Institutions included - N.A. - Interbank network: all banking groups (119). - Common exposure: All seven D-SIBs. - Intra-financial network: 8 groups of financial institutions. - Cross-border bank network: the banking system of selected countries. - Data and Starting position - N.A. - Starting position: 2018Q2 - Supervisory and market data. - Scope of consolidation: - Interbank and common exposure: individual banks. - Intra-financial: groups of financial institutions. - Cross-border: banking system. ### Financial System: Interconnectedness Analysis — Methodology - Overall framework - N.A. - Interbank: Espinosa-Vega and Solé (2010). - Common exposure: balance sheet approach. - Intra-financial network: Steady-state Markov Chain probability. - Cross-border network: Espinosa-Vega and Solé (2010) and Diebold and Yilmaz (2015). ### Financial System: Interconnectedness Analysis — Risks and Buffers - Risks - N.A. - Credit and funding losses related to interbank exposures, intra-financial exposures, and cross-border banking exposures. - Default of large common borrowers in the banking system. - Fire-sale of assets following sizeable withdrawals of deposits. - Buffers - N.A. - Interbank network: banks’ own capital and liquidity buffers. - Cross-border bank network: capital buffers of a banking system. ### Financial System: Interconnectedness Analysis — Reporting Format for Results - Output presentation - N.A. - Interbank network: a network chart, index of vulnerabilities. - Common exposure: system-wide capital shortfalls. - Intra-financial network: bilateral exposure matrices, a chart of steady state Markov Chain probability. - Cross-border network: index of vulnerabilities and contagion, a heatmap of bank distress, and spillover charts. *Source: 2. Methodology — 1sgpea2019001* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1sgpea2019001.pdf_