## _cr04104 — 1. Structure of the Financial System ## Source details **Canonical URL:** [_cr04104 — 1. Structure of the Financial System](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04104.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04104.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04104.pdf.json) --- ### Overall stability assessment: key findings - Singapore’s financial sector is dominated by the banking sector and "remains robust despite a series of economic downturns and substantial asset price declines." - Local banks (55 percent share of domestic banking assets) are "profitable and well capitalized," "liquid," "adequately provisioned for nonperforming asset exposures," and "conservative in their management practices." - The insurance sector is "well capitalized and profitable overall." - Stress test results indicate systemically important banks (including major foreign bank branches) and insurance companies "could withstand significant shocks." - Main potential risks to financial sector profitability: "further negative shocks in external demand, continued weakness in the labor market, higher interest rates, lower asset prices, and the persistent threat of terrorism in the region." - Systemic liquidity is well managed; the overnight facility introduced in 2001 "has helped reduce the volatility of short-term interbank rates." MAS plans an intraday liquidity facility with payment system upgrades. - Regulatory and supervisory practices show a "high degree of observance of international standards and codes" though MAS accountability, independence, and disclosure could be enhanced. - MAS’ conservative regulatory framework has helped banks weather shocks but may constrain future growth; authorities are reviewing: rules for computing banks’ CARs, bank-specific capital requirement processes, and regulatory minimum capital requirements that are "currently significantly above Basel Accord requirements." - The corporate bond market is "not yet at an advanced stage of development" and market growth has been constrained by the size and structure of the domestic economy and "ample liquidity in the banking system." ### Key policy recommendations (Box 1) - Macro-prudential monitoring: - Strengthen MAS monitoring of (i) risks from new financial products; (ii) cross-border financial flows (including flows in the ADM and particularly transactions between branches and head offices); (iii) household and corporate sector balance sheets; and (iv) market and counter-party risks of derivatives activities by financial institutions. - Regulatory systems and supervisory practices: - Complete the review of the regulatory minimum capital requirements for local banks. - Implement a new risk-based capital framework for the insurance industry (planned for introduction in late 2004). - Complete the ongoing review of the MAS Act. - MAS accountability, independence, and oversight: - Reduce potential conflicts of interest arising from the multiple official responsibilities of the Chairman of the MAS. - Monetary and financial policy transparency: - Provide more information on how supervisory actions are taken in line with the risk-based supervisory framework and disclose more information to improve public assessment of supervisory performance. - Anti-money laundering and combating the financing of terrorism: - Improve the effectiveness of cross-border mutual legal assistance. - Capital market development: - Review and address factors constraining the corporate bond market, including the limited use of credit ratings, the guaranteed interest rates of the Central Provident Fund (CPF), and the CPF investment policy. ### Recent financial sector reforms and ongoing initiatives - Reforms since 1998 aimed at: (i) opening the financial industry to greater foreign competition; (ii) aligning regulation/supervision with international best practices; (iii) developing deep and liquid fixed-income and equity markets; (iv) promoting the asset management industry; and (v) gradual liberalization of international use of the Singapore dollar. - 1999 five-year program to liberalize the domestic banking sector: allowed foreign banks to expand operations and encouraged consolidation among local banks. - Ongoing and planned initiatives: - Introduction of a risk-based capital framework for the insurance industry in late 2004. - Separation of financial and nonfinancial activities by requiring banks to divest nonfinancial activities by July 2004 (extensions available to July 2006). - Introduction of the second generation of the MAS Electronic Payment System (MEPS) in 2005. - A deposit insurance scheme under development and expected to be introduced in 2005. - MAS engaged with local banks in preparation for the New Basel Capital Accord (Basel II) and enhancement of internal rating infrastructures for credit risk measurement. ### Structure and scale of the financial system — sectoral counts and assets (end-September 2003) - Total institutions: "584" - Total assets: "S$1,226.5" billion; "100.0" percent of financial system assets; "787.6" percent of 2002 GDP - Commercial banks: "115" institutions; "S$1,049.6" billion; "85.6" percent of total assets; "674.0" percent of 2002 GDP - Local banks: "5" institutions; "S$257.0" billion; "21.0" percent; "165.0" percent of 2002 GDP - Foreign banks: "110" institutions; "S$792.6" billion; "64.6" percent; "509.0" percent of 2002 GDP - Qualifying full banks: "6" institutions; "S$224.9" billion; "18.3" percent; "144.4" percent of GDP - Other full banks: "16" institutions; "S$63.8" billion; "5.2" percent; "41.0" percent of GDP - Offshore banks: "50" institutions; "S$192.9" billion; "15.7" percent; "123.9" percent of GDP - Wholesale banks: "38" institutions; "S$311.0" billion; "25.4" percent; "199.7" percent of GDP - Merchant banks: "51" institutions; "S$58.3" billion; "4.8" percent; "37.4" percent of GDP - Finance companies: "4" institutions; "S$11.1" billion; "0.9" percent; "7.1" percent of GDP - Insurance companies: "140" institutions; "S$71.8" billion; "5.9" percent; "46.1" percent of GDP - Direct insurers: "56" institutions; "S$66.3" billion; "5.4" percent; "42.6" percent of GDP - Life insurers: "6" institutions; "S$5.5" billion; "0.4" percent; "3.5" percent of GDP - General insurers: "43" institutions; "S$3.9" billion; "0.3" percent; "2.5" percent of GDP - Composite insurers: "7" institutions; "S$56.9" billion; "4.6" percent; "36.5" percent of GDP - Reinsurers: "33" institutions; "S$4.5" billion; "0.4" percent; "2.9" percent of GDP - Captive insurers: "51" institutions; "S$1.0" billion; "0.1" percent; "0.6" percent of GDP - Insurance brokers: "59" institutions; "S$1.0" billion; "0.1" percent; "0.6" percent of GDP - Holders of capital market services (CMS) license: "166" institutions; "S$34.6" billion; "2.8" percent; "22.2" percent of GDP - Dealing in securities: "62" institutions; "S$28.8" billion; "2.3" percent; "18.5" percent of GDP - SGX-ST members: "24" institutions; "S$2.5" billion; "0.2" percent; "1.6" percent of GDP - SGX-ST non-members: "38" institutions; "S$26.3" billion; "2.1" percent; "16.9" percent of GDP - Trading in futures contracts: "23" institutions; "S$3.5" billion; "0.3" percent; "2.2" percent of GDP - Fund management: "84" institutions; "S$2.3" billion; "0.2" percent; "1.5" percent of GDP - Holders of financial advisers’ licenses: "48" institutions; "S$0.1" billion; "0.0" percent; "0.0" percent of GDP - Memorandum: Central Provident Fund: - "1" institution; "S$102.1" billion; "..." percent of total assets; "65.6" percent of 2002 GDP - Note: Total assets exclude operations of local financial institutions’ foreign branches and subsidiaries. For local banking groups, total consolidated assets (including foreign operations) were "S$352.6" billion at end-September. ### Asian Dollar Market (ADM) - Total assets in the ADM: "US$486 billion at the end of 2002," equivalent to "about 550 percent of Singapore’s GDP." - Since the Asian crisis, loans to East Asia (excluding Japan) "have halved," and most interbank lending has been directed to Europe. - ADM activities shifted from nonbank lending to interbank lending; ADM exposures consist mainly of interbank lending with "virtually no losses even during the Asian crisis." - Surveillance recommendation: enhance macroprudential monitoring of ADM flows and intra-group transactions with head offices/branches. ### Risks to Financial Stability and transmission channels - Resilience observed to shocks: Asian crisis (1997–98); electronics exports drop (2000–01); SARS outbreak (early 2003). - Sources of resilience: sound fiscal and monetary policies, external current account surpluses, significant external assets and reserves, healthy corporate sector, high household wealth, conservative regulation/supervision. - Enumerated potential risks: - (i) negative shocks in external demand - (ii) persistent weakness in the labor market - (iii) a sharp increase in interest rates - (iv) declines in asset prices - Transmission channels: - declines in household incomes and corporate earnings → higher NPLs; - declines in household wealth; - depressed investment → reduced loan demand; - lower collateral values; - increased exposures of financial institutions to market risks. - Additional risk: continuing threat of terrorism in the region affecting Singapore’s image and investment/growth. ### Commercial banking sector — soundness and performance (selected indicators) - Profitability (local banks, after-tax return on assets): 1998: 0.4; 1999: 1.2; 2000: 1.3; 2001: 0.8; 2002: 0.8; 2003 1st 3Q: 0.8 - After-tax return on equity (local banks): 1998: 4.2; 1999: 10.7; 2000: 12.6; 2001: 7.7; 2002: 7.6; 2003 1st 3Q: 7.8 - Net interest margin (local banks): 1998: 2.3; 1999: 2.2; 2000: 2.2; 2001: 2.0; 2002: 2.1; 2003 1st 3Q: 2.0 - Non-interest income to total income (local banks): 1998: 26.8; 1999: 31.8; 2000: 29.3; 2001: 36.4; 2002: 32.4; 2003 1st 3Q: 37.9 - Cost efficiency: Non-interest expenses to total income fell from about 44 percent in 2001 to below 40 percent in the first nine months of 2003. - Capital adequacy (local banks): - Regulatory capital to risk-weighted assets: 1998: 18.1; 1999: 20.6; 2000: 19.6; 2001: 18.1; 2002: 16.9; 2003 1st 3Q: 17.8 - Regulatory tier I capital to risk-weighted assets: 1998: 16.0; 1999: 17.4; 2000: 16.4; 2001: 11.6; 2002: 11.3; 2003 1st 3Q: 11.6 - Shareholders’ equity to assets: 1998: 10.0; 1999: 11.0; 2000: 10.0; 2001: 10.0; 2002: 11.0; 2003 1st 3Q: 11.0 - Asset quality: - Classified loans to total loans (local banks): 1998: 7.8; 1999: 8.5; 2000: 5.6; 2001: 5.7; 2002: 5.5; 2003 1st 3Q: 5.3 - NPLs to total loans (local banks): 1999: 5.3; 2000: 3.4; 2001: 3.6; 2002: 3.4; 2003 1st 3Q: 3.5 - Total provisions to classified loans (local banks): 1998: 51.1; 1999: 53.8; 2000: 53.8; 2001: 56.9; 2002: 60.2; 2003 1st 3Q: 64.3 - Total provisions to NPLs (local banks): 1999: 86.2; 2000: 87.2; 2001: 90.1; 2002: 96.7; 2003 1st 3Q: 96.6 - Specific provisions to classified loans (local banks): 1998: 28.8; 1999: 34.2; 2000: 29.5; 2001: 32.6; 2002: 33.8; 2003 1st 3Q: 35.7 - Liquidity (Singapore operations, local banks): - Liquid DBU assets to total DBU assets: 1998: 13.0; 1999: 15.7; 2000: 14.2; 2001: 14.4; 2002: 15.4; 2003 1st 3Q: 15.4 - Liquid DBU assets to total DBU liabilities: 1998: 21.3; 1999: 23.6; 2000: 23.9; 2001: 23.2; 2002: 22.4; 2003 1st 3Q: 22.6 - Total DBU deposits to total deposits: 1998: 74.5; 1999: 75.4; 2000: 71.7; 2001: 70.3; 2002: 71.8; 2003 1st 3Q: 71.9 - Non-bank customers share of DBU deposits: 1998: 84.3; 1999: 89.3; 2000: 85.7; 2001: 91.7; 2002: 93.3; 2003 1st 3Q: 94.0 ### Local banks’ foreign operations and profitability - Foreign operations generated "31 percent of total pre-tax profits of local banks in the first nine months of 2003 (up from nil in 2000)." - Interest earnings accounted for "62 percent of local banks’ combined income in the first nine months of 2003." - Average capital adequacy ratio (CAR) was "about 18 percent at end-September 2003." - Liquidity requirements: banks must keep interest-free cash balances with MAS equivalent to "3 percent of their liabilities base on average for two weeks" and hold at least "18 percent of their liabilities base in liquid assets" unless under risk-based minimum liquid asset framework. - NPL trends: average overall NPLs to total loans for local banks (including overseas) declined from "5.3 percent at end-1999 to 3.5 percent at end-September 2003." - Provisioning and collateral: - Overall provisions to total classified loans rose to "about 64 percent at end-September 2003." - Specific provisions to total classified loans rose to "about 36 percent at end-September 2003." - These represent about "97 percent and 54 percent of NPLs, respectively, at end-September 2003." - MAS uses conservative classified loan criteria; "Net of collateral, classified loans are provisioned at more than 100 percent in all local banks." - Derivatives exposures: Net mark-to-market values of local banks’ derivative exposures amounted to "S$0.5 billion at end-September 2003." - Foreign bank branches: account for "76 percent of the estimated potential counterparty credit risk exposures in local banks’ derivatives books." NPLs for foreign banks were "2.5 percent of total loans at end-September 2003." ### Stress tests — scenarios and quantitative results - Scenarios (developed November 2002): - Scenario 1: global weakness that slows Singapore’s growth and reduces asset prices (assumed Singapore real GDP growth: "0.0"). - Scenario 2: global recession compounded with heightened threats of regional terrorism (assumed Singapore real GDP growth: "-1.7"). - Scenario calibration examples (selected): - Total market risk losses (including net interest income impacts) averaged: "-5.0 in Scenario 1 (gains) and 7.6 in Scenario 2 (losses) as a percentage of pre-tax operating profits (simple average)." - Credit risk losses averaged: "42.7 in Scenario 1 and 63.4 in Scenario 2 as a percentage of pre-tax operating profits (simple average)." - Total stress test losses averaged: "37.7 in Scenario 1 and 70.0 in Scenario 2 as a percentage of pre-tax operating profits (simple average)." - Key stress-test findings: - Potential losses in all but one participating bank can be absorbed by 2002 pre-tax profits. - Existing capital buffers and home office support (for foreign banks) offer additional protection. - Limited role of foreign-currency-denominated deposits and loans for nonbank residents limits vulnerability: such loans and deposits in local banks accounted for "only 5.5 percent of total domestic loans and about 8 percent of total domestic deposits at end-September 2003." ### Insurance sector — performance, stress tests, and challenges - Sector openness: advanced and open to foreign investment with no aggregate foreign ownership limit on local direct insurers. - Life insurance growth and metrics: - Total new business premium growth: -48.0 (1998), 114.0 (1999), 72.4 (2000), 127.8 (2001), -26.6 (2002), 10.0 (2003 First Three Quarters). - Premiums as a percentage of GDP (life): 3.5 (1998), 3.3 (1999), 3.2 (2000), 3.4 (2001), 3.5 (2002). - Nonlife insurance: Gross premium annual change: -7.2 (1998), 3.6 (1999), 18.8 (2000), 17.3 (2001), 19.5 (2002), 3.5 (2003 First Three Quarters). Premiums as percent of GDP (nonlife): 1.1 (1998), 1.0 (1999), 1.0 (2000), 1.2 (2001), 1.4 (2002). - Profitability: Life insurance profitable overall; nonlife profitable but weakened in 2001–02 partly due to rising expenses. - Stress tests: - Nonlife sector would remain largely unaffected by scenarios due to limited exposure to equities and property. - Life insurance could maintain statutory solvency margins under the less severe scenario; under the more severe scenario, remedial measures (including temporarily reducing bonus rates) would be needed. - Challenges: domestic market small; CPF guaranteed interest rates exceed comparable market yields, constraining funds away from insurance products; conservative investment mixes and high liquidity. ### Systemic liquidity management and safety nets - Policy objective: ensure smooth functioning of the payment system and the financial system at all times. - Minimum cash balance target: "about 3 percent of deposits"; daily cash balances allowed to fluctuate between "2 percent and 4 percent." - Overnight borrowing facility (since November 2000): credit through SGS repos at an interest rate of "2 percentage points above the one-month interbank rate"; access requires application to MAS and is not automatic. - MAS plans a collateralized and automated intraday liquidity facility in conjunction with MEPS upgrade. - MAS may provide emergency liquidity assistance collateralized with SGS and may consider other collateral (statutory board bonds, corporate bonds, or G7 government bonds) in extreme systemic crisis. - Historical intervention example: MAS injected "S$2.5 billion on September 12, 2001" and widened the exchange rate policy band. ### Payment and settlement systems — MEPS, MEPS-SGS, and CDP (key points) - MEPS handles "about 95 percent of the total value of all electronic transactions and noncash payments in Singapore." - MEPS is an RTGS system; MEPS-SGS provides delivery-versus-payment for SGS. - Outstanding SGS volume: "S$62 billion (39.8 percent of 2002 GDP) at end-September 2003." - Average daily SGS trading volume: "S$2.7 billion" for first nine months of 2003; SGS repo average daily trading volume: "S$2.6 billion." - MEPS operational reliability: high; planned upgrades include SWIFT channel and intraday repo facility. - CDP: clears and settles equities and private debt; 1.1 million direct accountholders; can settle in a T+3 cycle and has robust clearing fund and liquidity arrangements. - Recommendations: publish an oversight framework document for securities settlement systems; strengthen legal basis for certain repo/securities lending arrangements and legal immunity of blocked securities during settlement. ### Regulation, supervision, observance of standards and transparency - MAS is unified central bank and consolidated supervisor with high observance of international standards (BCP, IAIS, IOSCO, CPSS, CPSS-IOSCO RSSS). - Areas for enhancement: - MAS accountability, independence, and disclosure — multiple official responsibilities of the Chairman (concurrent Deputy Prime Minister and Minister for Finance) could give rise to conflicts of interest; FSAP recommends moving to a more conventional separation or other safeguards. - Monetary policy transparency: nondisclosure of TWI weights, precise limits of the band, and the extent of FX interventions reduces accountability; MAS publishes semi-annual Monetary Policy Statement and Macroeconomic Review. - Financial policy transparency: provide more information on supervisory actions under risk-based framework and on recent financial sector developments and MAS supervisory activities. - Data and monitoring: standardize and enhance data collection to monitor banks’ derivatives activities and ADM flows. - Regulatory reviews underway: - Review of rules for computing banks’ CARs and regulatory minimum Tier 1 capital requirement ("8 percent") and total capital requirement ("12 percent"). - Implementation of risk-based capital frameworks: securities firms (2002) and insurance industry (planned late 2004). ### Corporate bond market development — findings and recommendations - Outstanding corporate bonds (end-June 2003): total "S$109.3 billion" (Singapore dollar corporate bonds: "S$54.8 billion"; foreign currency-denominated bonds: "about S$54.5 billion"). - Challenges: market not yet advanced; constrained by domestic economy size and ample banking liquidity. - Recommendations: - Increase use of credit ratings to broaden investor base and tradability. - Review CPF investment policy: consider replacing some nonmarketable SGS holdings with high-quality long-term corporate bonds to supply private sector long-term funds. - Align CPF guaranteed rates with market rates; guaranteed CPF rates: "2.5 percent in the ordinary account and 4.0 percent in the special account." At end-September 2003, uninvested CPF funds amounted to "about S$67 billion." ### Mandatory deposit insurance and crisis management - MAS consultation paper (August 2002) proposed a compulsory deposit insurance scheme for full banks and finance companies. - Proposed funding: risk-based premium partly based on new supervisory bank risk rating system. - Coverage proposed: "up to S$20,000 per depositor and per institution." - Planning ongoing with intention of introducing the scheme in "2005." FSAP team finding: no significant weaknesses in the proposal. - Financial system crisis management framework covers payment system disruptions, real sector shocks with financial implications, regional instability/conflict involvement, and failure of systemically important institutions. Objective: minimize disruption to critical financial market functions and maintain confidence. ### AML/CFT assessment — main findings and recommended actions - Overall: "Singapore complies well with most of the assessable FATF 40+ 8 Recommendations." Framework described as sound and comprehensive. - Positive elements: - Corruption, Drug Trafficking and other Serious Crimes Act broadened ML criminalization and duty to report suspicious transactions. - Mutual Assistance in Criminal Matters Act (MACMA) enacted in 2000; STRO operational January 2000 and an Egmont member since June 2002. - MAS Notices impose sector-specific CDD, internal controls, audit, and training requirements. - Key areas needing attention: - Limitations in practice on providing certain kinds of mutual legal assistance (provision of bank records, restraint of proceeds, enforcement of confiscation orders). - Palermo Convention signed but not yet ratified; recommend expedited ratification. - No current requirement regarding originator information on funds transfers meeting Special Recommendation VII standards; Singapore plans compliance within FATF timeframe (deadline elsewhere cited as "February 2005"). - Notices should be updated to align with revised FATF 40 Recommendations (June 2003) and to provide clearer implementation guidance. - Recommended Action Plan highlights (verbatim policy language preserved): - Adopt specific provisions addressing tracing and identification of proceeds (FATF 7). - Make Notices more explicit on identity documentation, beneficial owner identification, and intermediaries (FATF 10-13). - Remind financial institutions to submit suspicious transaction reports "without delay"; consider annual refresher training and extend tipping off prohibition to TSOFA reports. - Broaden availability of compulsory mutual legal assistance measures and consider narrowing bases for refusal in MACMA. - MAS supervisory practices: - MAS reviews AML/CFT compliance mainly through on-site inspections and audit reports; recommendation to ensure adequate inspection frequency and consider annual on-site AML/CFT coverage for institutions with vulnerable business lines. ### Supplementary: 2003 local banks’ financial results (selected weighted averages) - Weighted average CAR rose to "about 18 percent" as of 2003; regulatory capital to risk-weighted assets series: 18.1, 20.6, 19.6, 18.1, 16.9, 17.8, 17.9 - Total provisions to classified loans: 51.1, 53.8, 53.8, 56.9, 60.2, 64.3, 66.6 - Total provisions to NPLs: ... , 86.2, 87.2, 90.1, 96.7, 96.6, 107.8 - After-tax return on assets: 0.4, 1.2, 1.3, 0.8, 0.8, 0.8, 0.9 - After-tax return on equity: 4.2, 10.7, 12.6, 7.7, 7.6, 7.8, 8.3 - Non-interest income to total income: 26.8, 31.8, 29.3, 36.4, 32.4, 37.9, 38.4 - Non-interest expenses to total income: 33.5, 33.3, 39.6, 43.6, 40.3, 39.5, 39.7 - Loan concentration — Housing loans (percent of total loans): 18.2, 21.3, 22.3, 26.0, 27.5, 28.3, 28.9 *Source: _cr04104 — IMF Financial System Stability Assessment Supplementary Information (excerpts).* ### 1. Structure of the Financial System ................................................................................10 ### 1. Structure of the Financial System ### Overall stability assessment: key findings - Singapore’s financial sector is dominated by the banking sector and "remains robust despite a series of economic downturns and substantial asset price declines." - Local banks (55 percent share of domestic banking assets) are "profitable and well capitalized," "liquid," "adequately provisioned for nonperforming asset exposures," and "conservative in their management practices." - The insurance sector is "well capitalized and profitable overall." - Stress test results indicate systemically important banks (including major foreign bank branches) and insurance companies "could withstand significant shocks." - Main potential risks to financial sector profitability include: "further negative shocks in external demand, continued weakness in the labor market, higher interest rates, lower asset prices, and the persistent threat of terrorism in the region." - Systemic liquidity is well managed; the overnight facility introduced in 2001 "has helped reduce the volatility of short-term interbank rates." MAS plans an intraday liquidity facility with payment system upgrades. - Regulatory and supervisory practices show a "high degree of observance of international standards and codes" though MAS accountability, independence, and disclosure could be enhanced. - MAS’ conservative regulatory framework has helped banks weather shocks but may constrain future growth; authorities are reviewing: rules for computing banks’ CARs, bank-specific capital requirement processes, and regulatory minimum capital requirements that are "currently significantly above Basel Accord requirements." - The corporate bond market is "not yet at an advanced stage of development" and market growth has been constrained by the size and structure of the domestic economy and "ample liquidity in the banking system." ### Key policy recommendations (Box 1) - Macro-prudential monitoring: - Strengthen MAS monitoring of (i) risks from new financial products; (ii) cross-border financial flows (including flows in the ADM and particularly transactions between branches and head offices); (iii) household and corporate sector balance sheets; and (iv) market and counter-party risks of derivatives activities by financial institutions. - Regulatory systems and supervisory practices: - Complete the review of the regulatory minimum capital requirements for local banks. - Implement a new risk-based capital framework for the insurance industry (planned for introduction in late 2004). - Complete the ongoing review of the MAS Act. - MAS accountability, independence, and oversight: - Reduce potential conflicts of interest arising from the multiple official responsibilities of the Chairman of the MAS. - Monetary and financial policy transparency: - Provide more information on how supervisory actions are taken in line with the risk-based supervisory framework and disclose more information to improve public assessment of supervisory performance. - Anti-money laundering and combating the financing of terrorism: - Improve the effectiveness of cross-border mutual legal assistance. - Capital market development: - Review and address factors constraining the corporate bond market, including the limited use of credit ratings, the guaranteed interest rates of the Central Provident Fund (CPF), and the CPF investment policy. ### Recent financial sector reforms and ongoing initiatives - Reforms since 1998 aimed at: (i) opening the financial industry to greater foreign competition; (ii) aligning regulation/supervision with international best practices; (iii) developing deep and liquid fixed-income and equity markets; (iv) promoting the asset management industry; and (v) gradual liberalization of international use of the Singapore dollar. - 1999 five-year program to liberalize the domestic banking sector: allowed foreign banks to expand operations and encouraged consolidation among local banks. - Ongoing and planned initiatives: - Introduction of a risk-based capital framework for the insurance industry in late 2004. - Separation of financial and nonfinancial activities by requiring banks to divest nonfinancial activities by July 2004 (extensions available to July 2006). - Introduction of the second generation of the MAS Electronic Payment System (MEPS) in 2005. - A deposit insurance scheme under development and expected to be introduced in 2005. - MAS engaged with local banks in preparation for the New Basel Capital Accord (Basel II) and enhancement of internal rating infrastructures for credit risk measurement. ### Structure and scale of the financial system - Singapore is "a major international financial center" with about "580 financial institutions," many foreign. - The Asian Dollar Market (ADM): - Total assets in the ADM were "US$486 billion at the end of 2002," equivalent to "about 550 percent of Singapore’s GDP." - Key players in the ADM: local banks and large internationally active financial institutions. - Since the Asian crisis, loans to East Asia (excluding Japan) "have halved," and most interbank lending has been directed to Europe. - Sectoral share and end-September 2003 totals (from Table 1): - Total institutions: "584" - Total assets: "S$1,226.5" billion; "100.0" percent of financial system assets; "787.6" percent of 2002 GDP (table shows "Total 584 1,226.5 100.0 787.6") - Commercial banks: "115" institutions; "S$1,049.6" billion; "85.6" percent of total assets; "674.0" percent of 2002 GDP - Local banks: "5" institutions; "S$257.0" billion; "21.0" percent of total assets; "165.0" percent of 2002 GDP - Foreign banks: "110" institutions; "S$792.6" billion; "64.6" percent of total assets; "509.0" percent of 2002 GDP - Qualifying full banks: "6" institutions; "S$224.9" billion; "18.3" percent; "144.4" percent of GDP - Other full banks: "16" institutions; "S$63.8" billion; "5.2" percent; "41.0" percent of GDP - Offshore banks: "50" institutions; "S$192.9" billion; "15.7" percent; "123.9" percent of GDP - Wholesale banks: "38" institutions; "S$311.0" billion; "25.4" percent; "199.7" percent of GDP - Merchant banks: "51" institutions; "S$58.3" billion; "4.8" percent; "37.4" percent of GDP - Finance companies: "4" institutions; "S$11.1" billion; "0.9" percent; "7.1" percent of GDP - Insurance companies: "140" institutions; "S$71.8" billion; "5.9" percent; "46.1" percent of GDP - Direct insurers: "56" institutions; "S$66.3" billion; "5.4" percent; "42.6" percent of GDP - Life insurers: "6" institutions; "S$5.5" billion; "0.4" percent; "3.5" percent of GDP - General insurers: "43" institutions; "S$3.9" billion; "0.3" percent; "2.5" percent of GDP - Composite insurers: "7" institutions; "S$56.9" billion; "4.6" percent; "36.5" percent of GDP - Reinsurers: "33" institutions; "S$4.5" billion; "0.4" percent; "2.9" percent of GDP - Captive insurers: "51" institutions; "S$1.0" billion; "0.1" percent; "0.6" percent of GDP - Insurance brokers: "59" institutions; "S$1.0" billion; "0.1" percent; "0.6" percent of GDP - Holders of capital market services (CMS) license: "166" institutions; "S$34.6" billion; "2.8" percent; "22.2" percent of GDP - Dealing in securities: "62" institutions; "S$28.8" billion; "2.3" percent; "18.5" percent of GDP - SGX-ST members: "24" institutions; "S$2.5" billion; "0.2" percent; "1.6" percent of GDP - SGX-ST non-members: "38" institutions; "S$26.3" billion; "2.1" percent; "16.9" percent of GDP - Trading in futures contracts: "23" institutions; "S$3.5" billion; "0.3" percent; "2.2" percent of GDP - Fund management: "84" institutions; "S$2.3" billion; "0.2" percent; "1.5" percent of GDP - Holders of financial advisers’ licenses: "48" institutions; "S$0.1" billion; "0.0" percent; "0.0" percent of GDP - Memorandum: Central Provident Fund: - "1" institution; "S$102.1" billion; "..." percent of total assets; "65.6" percent of 2002 GDP - Note: Total assets exclude operations of local financial institutions’ foreign branches and subsidiaries. For local banking groups, total consolidated assets (including foreign operations) were "S$352.6" billion at end-September (table footnote). ### Systemic linkages and foreign bank presence - Main financial linkages: local banks’ overseas operations, activities in the ADM (offshore banking market), and foreign banks’ presence in the domestic market. - Local banks’ increasing overseas operations expose them to external shocks, but geographic diversification helps dampen domestic shocks. - Local banks’ ADM activities are mainly interbank lending and have experienced "virtually no losses even during the Asian crisis." - Despite increased foreign bank presence domestically, "no single bank has a large market position." Stringent licensing, assurances of liquidity support from foreign head offices, and risk-focused supervision in cooperation with foreign regulators mitigate risks from foreign banks to domestic stability. *Source: _cr04104 - 1. Structure of the Financial System (IMF chapter).* ### 2003. For insurance brokers, holders of CMS and Financial Advisers’ licenses, the assets data were as at end- ### _cr04104 - 2003. For insurance brokers, holders of CMS and Financial Advisers’ licenses, the assets data were as at end- ### Risks to Financial Stability - Singapore’s financial sector has been resilient to three major shocks: the Asian crisis in 1997–98; a sharp drop in electronics exports in 2000–01; and the outbreak of SARS in early 2003. - Sources of resilience listed: sound fiscal and monetary policies, long-standing external current account surpluses, significant external assets and reserve positions, a healthy corporate sector, high household wealth, and conservative financial regulatory and supervisory practices. - Enumerated potential risks: - (i) negative shocks in external demand, - (ii) persistent weakness in the labor market, - (iii) a sharp increase in interest rates, - (iv) declines in asset prices. - Channels through which risks could affect the financial sector: - declines in household incomes and corporate earnings → higher nonperforming loans (NPLs); - declines in household wealth; - depressed investment → reduced demand for loans; - lower collateral values; - increased exposures of financial institutions to market risks. - Additional risk: continuing threat of terrorism in the region could adversely affect Singapore’s image as a safe haven and thus investment and growth. ### Stability Implications of Linkages to the Global Financial System - Banks are the main linkages between Singapore’s financial sector and the global financial system. - Key channels: - (i) international operations of local banks, including activities in the ADM, - (ii) role of foreign financial institutions in Singapore’s domestic banking market. - Local banks use the ADM mostly as an investment vehicle for excess liquidity rather than as a funding source; ADM exposures consist mainly of interbank lending with virtually no losses in the past. - Foreign institutions’ financial conditions in the ADM have little direct consequence for domestic financing intermediation because their domestic lending operations are relatively modest. ### Nonfinancial Corporate Sector (Box 3) - Profitability and leverage: - Return on assets fluctuated between 3 percent and 6 percent in the period (1997–2001). - Return on equity fluctuated between 6 percent and 14 percent in the period. - Average debt-equity ratio was 0.8 in 1999–2001, down from 1.0 in 1998. - Based on Worldscope data in 2002, the ratio in Singapore was 0.7 (comparable to Hong Kong SAR), and lower than United States (0.9), United Kingdom (1.3), Japan (1.5), and Korea (1.6). - Liquidity: - Current ratio exceeded unity in the past ten years except for 1998. - Short-term debt as a share of total debt remained stable at about 70 percent. - Table: Selected Financial Soundness Indicators for the Nonfinancial Corporate Sector, 1996–2001 - Debt-equity ratio: 1996: 0.8; 1997: 0.9; 1998: 1.0; 1999: 0.8; 2000: 0.8; 2001: 0.8 - Total corporate debt/GDP: 1996: 1.4; 1997: 1.5; 1998: 1.8; 1999: 1.6; 2000: 1.5; 2001: 1.7 - Current ratio (current assets/current liabilities): 1996–1999: 1.0; 2000: 1.1; 2001: 1.1 - Ratio of short-term debt to total debt: 1996–2000: 0.7; 2001: 0.6 - Return on asset (pre-tax, in percent): 1996: 6.6; 1997: 5.6; 1998: 3.7; 1999: 5.3; 2000: 6.0; 2001: 3.8 - Return on equity (pre-tax, in percent): 1996: 13.9; 1997: 11.6; 1998: 6.0; 1999: 11.7; 2000: 13.3; 2001: 7.3 ### Household Sector Financial Soundness (Box 4) - Household wealth and asset composition: - Residential properties account for 48 percent of household assets. - Currency and deposits: 22 percent. - Savings in the CPF: 13 percent. - Securities: 10 percent. - Household indebtedness and mortgages: - Mortgage loans account for over 70 percent of total household liabilities. - Home ownership is about 94 percent. - About 57 percent of mortgage loans are public housing loans; a large portion carries concessionary interest rates (currently 2.6 percent). - Ratio of mortgage loans to residential property values remained at 33 percent in 2002. - Virtually all mortgage loans carry flexible interest rates in Singapore. - Table: Selected Financial Soundness Indicators for the Household Sector, 2000–02 (selected figures) - Savings as percent of gross disposal income: 2000: 19.0; 2001: 19.0; 2002: 19.4 - Net wealth in percent of gross disposal income: 2000: 714.0; 2001: 688.6; 2002: 687.2 - Financial assets in percent of total assets: 2000: 49.0; 2001: 51.8; 2002: 52.5 - Of which currency and deposits: 2000: 21.5; 2001: 22.9; 2002: 22.2 - Of which shares and securities: 2000: 10.3; 2001: 9.8; 2002: 10.4 - Residential property assets in percent of total assets: 2000: 51.0; 2001: 48.2; 2002: 47.5 - Liabilities in percent of gross disposable income: 2000: 174.0; 2001: 178.9; 2002: 182.3 - Liabilities in percent of net worth: 2000: 24.4; 2001: 26.0; 2002: 26.5 - Liabilities in percent of financial assets: 2000: 40.0; 2001: 39.8; 2002: 39.9 - Mortgage loans in percent of total liabilities: 2000: 72.3; 2001: 72.1; 2002: 74.1 - Mortgage loans in percent of currency and deposits: 2000: 65.8; 2001: 64.9; 2002: 69.9 - Mortgage loans in percent of residential property assets: 2000: 27.8; 2001: 30.8; 2002: 32.7 ### Asian Dollar Market (ADM) and Market Surveillance (Box 5 and paragraphs) - Structural changes in the ADM since the 1980s and 1990s: post-crisis decline in total assets (1998: -9.7 percent year-on-year; 1999: -4.9 percent) and shifts in creditor/borrower distribution. - Post-crisis trends: - Loans to non-bank residents in crisis-hit Asian countries fell; - Non-bank deposits increased moderately (partly for safe haven reasons); - Asian countries became net providers of funds to the ADM; Europe became a net borrower. - Activities shifted from nonbank lending to interbank lending; Japanese banks scaled back presence. - ADM resilience factors: geographical diversification, reduced nonbank lending (lower credit risk), stringent approval processes for foreign banks, assurances of foreign head office support for branches, MAS’ risk-focused supervision in cooperation with foreign regulators. - Stability implications and surveillance needs: - While current international linkage stability implications are likely limited, there is scope for enhancing macroprudential monitoring, including monitoring the structure and nature of financial flows in the ADM. - Monitoring of substantial intra-group transactions with head offices or branches of local and foreign banks could also be enhanced. ### Commercial Banking Sector: Soundness and Performance - Profitability: - Average after-tax return on assets remained above 1 percent in 1999–2002 after adjusting for amortization of goodwill. - After-tax return on assets (local banks) by year: 1998: 0.4; 1999: 1.2; 2000: 1.3; 2001: 0.8; 2002: 0.8; 2003 1st 3Q: 0.8 - After-tax return on equity (local banks): 1998: 4.2; 1999: 10.7; 2000: 12.6; 2001: 7.7; 2002: 7.6; 2003 1st 3Q: 7.8 - Income composition and cost efficiency: - Net interest margin (local banks): 1998: 2.3; 1999: 2.2; 2000: 2.2; 2001: 2.0; 2002: 2.1; 2003 1st 3Q: 2.0 - Non-interest income to total income (local banks): 1998: 26.8; 1999: 31.8; 2000: 29.3; 2001: 36.4; 2002: 32.4; 2003 1st 3Q: 37.9 - Non-interest expenses to total income (local banks): 1998: 33.5; 1999: 33.3; 2000: 39.6; 2001: 43.6; 2002: 40.3; 2003 1st 3Q: 39.5 - Ratio of non-interest expenses to total income fell from about 44 percent in 2001 to below 40 percent in the first nine months of 2003. - Capital adequacy (local banks): - Regulatory capital to risk-weighted assets: 1998: 18.1; 1999: 20.6; 2000: 19.6; 2001: 18.1; 2002: 16.9; 2003 1st 3Q: 17.8 - Regulatory tier I capital to risk-weighted assets: 1998: 16.0; 1999: 17.4; 2000: 16.4; 2001: 11.6; 2002: 11.3; 2003 1st 3Q: 11.6 - Shareholders’ equity to assets (local banks): 1998: 10.0; 1999: 11.0; 2000: 10.0; 2001: 10.0; 2002: 11.0; 2003 1st 3Q: 11.0 - Asset quality (local and foreign banks): - Classified loans to total loans (local banks): 1998: 7.8; 1999: 8.5; 2000: 5.6; 2001: 5.7; 2002: 5.5; 2003 1st 3Q: 5.3 - Classified loans to total loans (foreign banks): 1998: 11.8; 1999: 10.9; 2000: 8.8; 2001: 7.7; 2002: 8.0; 2003 1st 3Q: 5.1 - NPLs to total loans (local banks): 1999: 5.3; 2000: 3.4; 2001: 3.6; 2002: 3.4; 2003 1st 3Q: 3.5 - NPLs to total loans (foreign banks): 1999: 6.5; 2000: 5.4; 2001: 3.7; 2002: 3.7; 2003 1st 3Q: 2.5 - Total provisions to classified loans (local banks): 1998: 51.1; 1999: 53.8; 2000: 53.8; 2001: 56.9; 2002: 60.2; 2003 1st 3Q: 64.3 - Total provisions to NPLs (local banks): 1999: 86.2; 2000: 87.2; 2001: 90.1; 2002: 96.7; 2003 1st 3Q: 96.6 - Specific provisions to classified loans (local banks): 1998: 28.8; 1999: 34.2; 2000: 29.5; 2001: 32.6; 2002: 33.8; 2003 1st 3Q: 35.7 - Loan concentrations (local banks, percent of total loans): - Bank loans: 1998: 28.1; 1999: 31.2; 2000: 35.4; 2001: 30.0; 2002: 29.3; 2003 1st 3Q: 25.7 - Non-bank loans: 1998: 71.9; 1999: 68.8; 2000: 64.6; 2001: 70.0; 2002: 70.7; 2003 1st 3Q: 74.3 - Building and construction loans: 1998: 17.2; 1999: 16.6; 2000: 16.3; 2001: 15.5; 2002: 14.1; 2003 1st 3Q: 13.0 - Housing loans: 1998: 18.2; 1999: 21.3; 2000: 22.3; 2001: 26.0; 2002: 27.5; 2003 1st 3Q: 28.3 - Loans to professionals and private individuals: 1998: 12.6; 1999: 13.1; 2000: 13.8; 2001: 13.5; 2002: 14.1; 2003 1st 3Q: 14.0 - Loans to nonbank financial institutions: 1998: 15.4; 1999: 14.0; 2000: 14.7; 2001: 13.1; 2002: 13.4; 2003 1st 3Q: 13.5 - Liquidity (Singapore operations only): - Liquid DBU assets to total DBU assets (local banks): 1998: 13.0; 1999: 15.7; 2000: 14.2; 2001: 14.4; 2002: 15.4; 2003 1st 3Q: 15.4 - Liquid DBU assets to total DBU liabilities (local banks): 1998: 21.3; 1999: 23.6; 2000: 23.9; 2001: 23.2; 2002: 22.4; 2003 1st 3Q: 22.6 - Total DBU deposits to total deposits (local banks): 1998: 74.5; 1999: 75.4; 2000: 71.7; 2001: 70.3; 2002: 71.8; 2003 1st 3Q: 71.9 - Non-bank customers share of DBU deposits (local banks): 1998: 84.3; 1999: 89.3; 2000: 85.7; 2001: 91.7; 2002: 93.3; 2003 1st 3Q: 94.0 *Source: IMF staff report content in the supplied PDF excerpt.* ### 21. Local banks’ foreign operations account for a significant portion of their total ### Local banks’ foreign operations account for a significant portion of their total ### Foreign operations and profitability - Foreign operations generated 31 percent of total pre-tax profits of local banks in the first nine months of 2003 (up from nil in 2000). - Foreign operations more than offset declines in interest earnings. - Interest earnings accounted for 62 percent of local banks’ combined income in the first nine months of 2003. - Interest earnings pressures reflect: increased competition in the domestic market; weak loan demand associated with regional economic weakness; and high levels of liquidity in Singapore and major financial markets. ### Capital and liquidity positions - Average capital adequacy ratio (CAR) was about 18 percent at end-September 2003, though declining in recent years. - The average ratio for Tier 1 capital exceeded many countries’ total CAR. - High liquidity has been maintained partly owing to the minimum cash balance and minimum liquid asset requirements. - These liquidity requirements put pressures on local banks’ profitability. - Banks are required to keep interest-free cash balances with the MAS equivalent to 3 percent of their liabilities base on average for two weeks; in addition, banks are required to hold at least 18 percent of their liabilities base in liquid assets unless applied to the risk-based bank-specific minimum liquid asset framework. ### Loan quality and consumer credit policy - The average ratio of overall NPLs to total loans for local banks (including overseas operations) declined from 5.3 percent at end-1999 to 3.5 percent at end-September 2003. - The average ratio of classified loans to total loans fell from 8.5 percent in 1999 to 5.3 percent at end-September 2003. - NPLs are defined as overdue more than 90 days and comprise loss loans—including fully provisioned loss loans not written off—as well as substandard and doubtful loans. - The MAS uses NPLs and classified loans interchangeably and publishes only classified loans data. - The MAS imposes strict limits on consumer lending: residential mortgage loans are restricted to 80 percent of the property value; credit card balances are capped at twice the cardholder’s monthly income; and only individuals whose annual income exceeds S$30,000 can qualify for a credit card. - A consumer credit bureau was established in August 2002 to facilitate risk management of consumer loans. - August 2003 CPF changes included a 3-percentage-point cut in employer contributions and the reduction in the ceiling of salary subject to the CPF contribution; local bank representatives noted only a modest impact on mortgage portfolio performance. ### Provisioning and collateral - Overall provisions to total classified loans rose to about 64 percent at end-September 2003. - Specific provisions to total classified loans rose to about 36 percent at end-September 2003. - These rates represent about 97 percent and 54 percent of NPLs, respectively, at end-September 2003. - MAS uses conservative criteria for determining classified loans and these provision rates include the value of collateral. - Net of collateral, classified loans are provisioned at more than 100 percent in all local banks. ### Derivatives exposures and foreign bank branches - Net mark-to-market values of local banks’ derivative exposures amounted to only S$0.5 billion at end-September 2003. - Derivatives activities are concentrated in foreign exchange and interest rate products; credit derivatives grew substantially in 2002. - Foreign banks account for 76 percent of the estimated potential counterparty credit risk exposures in local banks’ derivatives books. - The 10 largest foreign bank branches in terms of deposits have remained profitable since 1999; their aggregate net income grew strongly in the first nine months of 2003 despite a sharp decline in operating profits due to increased provisions. - Average ratio of regulatory Tier I capital to risk-weighted assets for these foreign branches’ parent banks was about 8 percent at end-2002. - There is no systemic concern about these foreign bank branches; their NPLs were 2.5 percent of total loans at end-September 2003. ### Stress tests: scenarios and results - Two stress scenarios developed in November 2002: Scenario 1 simulates global weakness that slows Singapore’s growth and reduces asset prices; Scenario 2 assumes a global recession compounded with heightened threats of regional terrorism. Both include shocks to regional economies. - Scenario calibration examples: real GDP growth is assumed to be zero in Scenario 1 and -1.7 percent in Scenario 2. - Key stress-test findings: - Potential losses in all but one participating bank can be absorbed by 2002 pre-tax profits. - Existing capital buffers and home office support (for foreign banks) offer additional protection. - Limited role of foreign-currency-denominated deposits and loans for nonbank residents limits vulnerability; such loans and deposits in local banks accounted for only 5.5 percent of total domestic loans and about 8 percent of total domestic deposits at end-September 2003. - Total market risk losses (including net interest income impacts) averaged: -5.0 in Scenario 1 (gains) and 7.6 in Scenario 2 (losses) as a percentage of pre-tax operating profits (simple average). - Credit risk losses averaged: 42.7 in Scenario 1 and 63.4 in Scenario 2 as a percentage of pre-tax operating profits (simple average). - Total stress test losses averaged: 37.7 in Scenario 1 and 70.0 in Scenario 2 as a percentage of pre-tax operating profits (simple average). - Market risk effects: - Scenario 1: reduction in interest rates produced gains on net interest income and fixed income positions that more than offset equity and foreign exchange losses. - Scenario 2: foreign exchange exposures generated gains, but these were offset by net interest income losses from higher domestic interest rates and losses from lower equity prices. - Overall conclusion: Singapore’s systemically important banks have only modest risk exposure to the scenarios considered. ### Insurance sector—performance and stress tests - The insurance sector is advanced, functioning well, and open to foreign investment with no aggregate foreign ownership limit on local direct insurers. - Sector growth: - Life insurance experienced substantial growth in recent years, in part due to the January 2001 modification to the CPF Investment Schemes allowing CPF Special Account balances to purchase insurance products. - Nonlife insurance growth has been weaker; penetration levels are low by international standards. - Table highlights (selected): - Life insurance: Total new business premium growth: -48.0 (1998), 114.0 (1999), 72.4 (2000), 127.8 (2001), -26.6 (2002), 10.0 (2003 First Three Quarters). - Premiums as a percentage of GDP (life): 3.5 (1998), 3.3 (1999), 3.2 (2000), 3.4 (2001), 3.5 (2002). - Nonlife insurance: Gross premium (annual change): -7.2 (1998), 3.6 (1999), 18.8 (2000), 17.3 (2001), 19.5 (2002), 3.5 (2003 First Three Quarters). - Premiums as a percentage of GDP (nonlife): 1.1 (1998), 1.0 (1999), 1.0 (2000), 1.2 (2001), 1.4 (2002). - Profitability: - Life insurance is profitable overall; management expense rates are relatively favorable. - Nonlife insurance is profitable but profitability weakened significantly from 2001–02 partly due to rising expenses; automobile insurance concerns prompted independent claims assessment centers which show early positive results. - Stress test results for insurance: - Nonlife insurance sector would remain largely unaffected by the scenarios due to limited exposure to equities and property. - Life insurance could maintain statutory solvency margins from its own resources under the less severe scenario; under the more severe scenario, remedial measures (including temporarily reducing bonus rates) would be needed. - Challenges: - Domestic market is small. - CPF guaranteed interest rates exceed comparable market yields, constraining funds away from insurance products. - Investments are characterized by conservative asset mixes and high levels of liquidity; industry is developing Asset Liability Modeling techniques to improve investment efficiency. ### Systemic liquidity management and safety nets - Policy objective: ensure smooth functioning of the payment system and the financial system at all times. - Minimum cash balance target: about 3 percent of deposits; daily cash balances allowed to fluctuate between 2 percent and 4 percent. - An overnight borrowing facility (since November 2000) provides credit through SGS repos at an interest rate of 2 percentage points above the one-month interbank rate; access requires application to the MAS and is not automatic. - Inclusion of the Singapore dollar into the Continuous Linked Settlement (CLS) prompted MAS to introduce intraday liquidity injection systems; MAS plans a collateralized and automated intraday liquidity facility in conjunction with the second generation MEPS. - The MAS provides emergency liquidity assistance collateralized with SGS and may consider other collateral (statutory board bonds, corporate bonds, or G7 government bonds) in extreme systemic crisis. - Historical intervention example: MAS injected S$2.5 billion on September 12, 2001, to calm the market and widened the exchange rate policy band. *Source: IMF staff report (extracted content).* ### 36. The authorities have announced their intention to introduce a mandatory deposit ### _cr04104 - 36. The authorities have announced their intention to introduce a mandatory deposit ### Mandatory deposit insurance - Authorities announced intention to introduce a mandatory deposit insurance scheme to protect small depositors and to dispel public perception of a government guarantee on deposits. - MAS consultation paper published in August 2002 proposed a compulsory deposit insurance scheme for full banks and finance companies. - Proposed funding: risk-based premium partly based on the newly introduced supervisory bank risk rating system. - Coverage proposed: up to S$20,000 per depositor and per institution. - Planning ongoing with the intention of introducing the scheme in 2005. - FSAP team finding: no significant weaknesses in the proposal. ### Financial system crisis management framework - MAS instituted a financial system crisis management framework covering: - payment system disruptions; - various real sector shocks with significant financial sector implications; - regional instability and conflicts involving Singapore; - failure of one or more systemically important institutions. - Principal objective: minimize disruption to critical financial market functions so the system can continue to provide financial services and maintain confidence in the financial system and the Singapore dollar. - Systemically important financial institutions have conducted contingency planning exercises. ### Regulation, supervision, and observance of standards and codes - MAS continuing to enhance its risk-based approach to regulation and oversight. - Risk-based approach status and plans: - Already well established for banks. - Regulatory minimum liquid asset requirement made more flexible based on banks’ liquidity risk management capabilities. - MAS reviewing framework for setting capital adequacy requirements to account for risk profile and risk management capabilities of individual banks. - Risk-based capital framework introduced for securities firms in 2002. - Risk-based capital framework to be applied to the insurance industry in late 2004. - Consolidation progress: significant progress in consolidating different supervisory frameworks governing various financial sector segments. - Data and monitoring improvements: MAS moving to standardize and enhance its data collection process to facilitate monitoring of banks’ derivatives activities. - Capacity and observance: - Singapore has developed high technical competence and institutional infrastructure for effective supervision. - Regulatory systems and supervisory practices exhibit a high degree of observance of international standards and codes across all segments. - Scope remains for further enhancements, including implementation of risk-based capital for insurance. - Two specific areas for improvement: - Potential conflicts of interest from multiple official responsibilities of the Chairman of the MAS (the current Chairman is also Deputy Prime Minister and Minister of Finance); authorities reviewing the MAS Act and considering moving to separate responsibilities. - MAS could disclose more information on how supervisory actions are taken under the risk-based supervisory framework and on recent developments in the financial sector and supervisory activities; authorities studying ways to disclose more information. ### Main findings of assessments of observance of key international standards and codes (Box 7) - BCP for Effective Banking Supervision: MAS has established a sound prudential and regulatory framework and achieved a high level of observance; no weaknesses raising financial stability concern. - IAIS Insurance Core Principles: High level of observance; significant initiatives including overhaul of capital standards to a more comprehensive, risk-based approach with new rules on corporate governance and internal controls; implementation and enforcement of these initiatives are well advanced. - IOSCO Objectives and Principles of Securities Regulation: High degree of compliance; framework well developed and meets international standards; MAS should require periodic reporting of net asset values and ensure CIS operators have systems to calculate net asset values correctly. - CPSS Core Principles for Systemically Important Payment Systems (CPSIPS): Highly developed payment system; MEPS is reliable and robust and exhibits significant observance; inclusion of the Singapore dollar in CLS in September 2003 reduced settlement risk of FX transactions. - CPSS-IOSCO Recommendations for Securities Settlement Systems: MEPS-SGS and Central Depository Private Limited (CDP) are not subject to major vulnerabilities; recommendation that MAS publish a document on the oversight framework for securities settlement systems and its approach to administration. - Transparency in Monetary and Financial Policies: Transparency has improved substantially; authorities cautious about publishing certain information given exchange rate regime-based monetary policy (e.g., weights in trade-weighted exchange rate index and precise limits of the band not disclosed; extent of MAS FX interventions not disclosed on a predetermined or timely schedule); MAS meets many elements of the Transparency Code but could provide more detailed information on recent financial sector developments and supervisory activities, including local financial institutions’ overseas operations. - AML/CFT: Sound and comprehensive legal, institutional, policy, and supervisory framework in place; effectiveness of cross-border mutual legal assistance needs improvement regarding compulsory assistance at international request, including provision of bank records; Palermo Convention signed but not yet ratified; some aspects of customer due diligence need clearer specification. ### Corporate governance, disclosure, and accounting standards - Key initiatives: - Council on Corporate Disclosure and Governance formed in 2002 to promote good corporate governance, strengthen disclosure practices and reporting standards, and prescribe accounting standards. - Since beginning of 2003, companies listed on the SGX required to disclose corporate governance practices and explain deviations from the Code of Corporate Governance in annual reports. - MAS will issue guidelines for local banks and direct insurers including additional principles and guidance notes to enhance Boards’ and CEOs’ roles toward depositors and policy holders. - Accounting and disclosure practices: - Singapore follows international best practices in accounting standards and disclosure (Financial Reporting Standards based on International Accounting Standards). - All listed companies with market capitalization of more than S$75 million are required to report quarterly financial results. - All listed companies will be required by 2006 to change audit partners, and locally incorporated banks to change audit firms every five years. ### Structural issues — Challenges confronted by local banks - Strategic direction: All three local banks view regional expansion as preferred means of future growth; domestic market seen as mature with increased competition from foreign banks. - Risk management: - Local banks have capacity to manage expansion and appear prudent in evaluating new venture risks. - Recommendation: encourage further improvements in risk-management capabilities and periodic stress testing, including effects on foreign operations. - Capitalization and liquidity: - Local banks are conservatively managed based on capitalization and liquidity measures. - Bankscope data for 2001–02 suggest Singapore banks are substantially better capitalized than most of the largest 100 banks in the world and consistently more liquid. - Returns on equity diluted by high capital ratios: - Local banks voluntarily maintain a comfortable buffer above MAS regulatory minimums, which are significantly higher than the Basel minimum CAR of 8 percent. - MAS is reviewing: - rules for computing banks’ CARs; - the regulatory minimum Tier 1 capital requirement of 8 percent and total capital requirement of 12 percent; - the process of setting bank-specific capital requirements based on each bank’s risk profile and risk management capabilities. ### Corporate bond market development — findings and recommendations - Context: - Development of bond markets is a key government policy to enhance Singapore’s role as an international financial center. - Government increased issuance of debt securities despite budget surpluses to promote bond market development. - MAS implemented initiatives including tax incentives and liberalizing CPF Investment Schemes to enable CPF members to invest in insurance products, unit trusts, equities, and fixed-income securities. - New corporate bond issues rose in 2000–01, fell sharply in 2002, rebounded in 2003 due to increase in non-S$ issues; volume of outstanding corporate bonds increased steadily from 1998 to 2003. - Challenges: - Corporate bond market not yet at an advanced stage; constrained by size and structure of domestic economy. - Ample liquidity in banking system has dampened corporate bond issuance. - Recommendations to support further development: - Increase use of credit ratings: - Limited use of credit ratings may hinder development by limiting potential investors. - Second-tier companies are too small or reluctant to obtain ratings; foreign fund managers often required to avoid unrated issues. - Risk-based approach (in place in banking and securities sectors and to be introduced for insurance in 2004) provides incentive to obtain ratings because unrated bonds face higher risk charges. - More extensive use of credit ratings would facilitate institutional investors’ risk management, improve tradability, and help less-established companies access competitive funding. - Review CPF investment policy: - CPF currently invests undrawn balances in special nonmarketable SGS, locking up a large portion of domestic long-term funds away from capital markets. - Consider allowing CPF to replace some nonmarketable SGS with high-quality long-term corporate bonds carrying higher yields to supply private sector long-term funds. - Align CPF guaranteed rates with market rates: - Officially guaranteed rates of return on CPF accounts likely reduce demand for corporate bonds in a low interest rate environment. - Guaranteed rates: 2.5 percent in the ordinary account and 4.0 percent in the special account. - At end-September 2003, uninvested CPF funds amounted to about S$67 billion. - Aligning guaranteed CPF rates more closely with market rates on long-term investments would remove distortions and likely raise long-run returns on CPF savings. *Source: _cr04104 - 36. The authorities have announced their intention to introduce a mandatory deposit (excerpt).* ### 51. Singapore has about 580 local and foreign financial institutions. They offer a ### _cr04104 - 51. Singapore has about 580 local and foreign financial institutions. They offer a ### Overview - About 580 local and foreign financial institutions offering trade financing, loan syndication, foreign exchange trading, derivative products, securities trading and underwriting, fund management, and insurance services. - In international bank lending, Singapore banks represent about 3 percent of total international bank assets at end-2002 (compared with Hong Kong SAR (2.9 percent) and London (18.7 percent)). - Ranks fourth in foreign exchange trading and sixth in over-the-counter derivatives trading. - Equity market: more than 550 companies listed on the SGX. - Financial sector accounted for about 11 percent of GDP and 5 percent of total employment in 2002. ### Financial sector structure and recent trends - Sector dominated by the banking sector, particularly the ADM—an offshore banking sector. - Liberalization since 1997 and mergers led to consolidation: number of banks declined from 155 in 1997 to 115 in September 2003. - Total assets of financial institutions have risen marginally since 1997. ### Commercial banks - Commercial banks account for 86 percent of total financial sector assets at end-September 2003. - Banking system composition: - 5 local banks (owned by 3 local banking groups) - 110 foreign bank branches - Of these 110 foreign banks: 22 designated by the MAS as full banks (including 6 qualifying full banks), 38 as wholesale banks, and 50 as offshore banks. - Domestic banking is separated from offshore banking through accounting units: - Domestic Banking Unit (DBU): required to record transactions in Singapore dollars. - Asian Currency Unit (ACU): for foreign currency booking; ACUs encouraged via concessionary tax rates. - ACU regulatory/tax treatment: - Exempted from certain provisions of the Banking Act (including the minimum cash balance and statutory liquidity requirements imposed on DBUs). - ACU income subject to a concessionary tax rate of 10 percent for non-residents. - No reports on individual deposits and loans required; size of assets and liabilities subject to MAS limits. - Universal banking permitted; banks divided into three categories with specific restrictions and counts at end-September 2003: - Full banks: 27 total (5 domestic, 22 foreign). Six of the 22 foreign full banks granted qualifying full bank privileges (permitted up to 15 banking locations, up to 10 branches and the remainder off-premise ATMs; can relocate existing branches freely and share an ATM network). - Wholesale banks: 38 (all foreign branches). Restrictions include not accepting Singapore dollar term deposits of less than S$250,000 per deposit from nonbanks and not paying interest on Singapore dollar current accounts held by resident individuals. - Offshore banks: 50. Allowed same foreign currency operations as full banks; slightly more restricted in Singapore dollar transactions with residents than wholesale banks. ### Merchant banks - 51 merchant banks at end-September 2003, accounting for about 5 percent of total financial sector assets. - Governed by MAS Directives and Notices to Merchant Banks. - Typical activities: offshore banking, corporate finance, underwriting of share and bond issues, mergers and acquisitions, portfolio investment management. - Merchant banks cannot take sight or savings deposits in Singapore dollars and, with MAS approval, most operate ACUs. ### Finance companies - Make up about 1 percent of total assets. - Provide small-scale financing: mortgage loans and consumer credit (cars, durable goods). - Licensed under the Finance Companies Act and supervised by the MAS. ### Insurance industry - 140 insurance companies total: - 6 life insurers - 43 nonlife insurers - 7 composite insurers (both life and nonlife) - 33 reinsurers - 51 captive insurers - Locally owned: 2 life insurers, 8 nonlife insurers, 4 composite insurers, and 5 nonlife reinsurers; remaining insurers are subsidiaries or branches of foreign companies. - Sector size and composition at end-September 2003: - Insurance sector accounted for about 6 percent of total financial sector assets. - Direct insurers: >90 percent of total assets of the insurance sector. - Reinsurance business: negligible. - Offshore business: offshore life insurance immaterial; for nonlife insurance offshore sector ~just under 20 percent for direct insurers and 80 percent for reinsurers in terms of assets. - Captive insurance: 51 captive insurance companies (all but one subsidiaries of foreign companies). - Market metrics (2001, Swiss Re Sigma): - Total premiums: US$4 billion (ranked 34th in the world, 9th in the Asian region, 2nd in South East Asia). - Premiums per capita: US$959 (ranked 24th in the world and 5th in the region). - Insurance penetration (gross premiums written/GDP): 4.6 percent (below world average 7.8 percent and regional average 7.6 percent). ### Pension system (CPF) - CPF established in 1955 as a mandatory, fully-funded pension scheme. - Contribution rates from October 2003: set at 33 percent (20 percent paid by employees and 13 percent by employers). - CPF balances: S$102 billion (about 66 percent of GDP) as of September 2003. - CPF balances accounted for over 25 percent of households’ financial assets. - Housing scheme (introduced 1981) allows use of CPF savings to purchase houses; contributed to home ownership rate of 94 percent. - CPF Investment Schemes introduced in 1986 and enhanced in 2001 to allow members wider investment choices. ### Asset management industry - Hosts more than 200 asset management firms. - Total assets managed by Singapore-based financial institutions: - S$151 billion in 1998 - S$344 billion in 2002 - Discretionary assets as of end-2002: S$183 billion, of which 30 percent came from Singapore and the rest from abroad (mainly Europe and the United States). - Growth driven by transfers of regional portfolios to Singapore and centralization of regional trading and back office functions. ### Other entities - Government of Singapore Investment Corporation (GIC): - Largest investment company in Singapore; wholly owned by the government. - Manages state assets by investing abroad in equities, fixed income and money market instruments, and real estate. - Assets managed reportedly grown to more than US$100 billion (details of investments not made public). - Together with the MAS, outsourced S$35 billion to external fund managers to promote fund management industry development. - Housing and Development Board (HDB): - Provides housing loans and develops public housing for sale and rental; established in 1960. - About 85 percent of Singaporeans live in HDB housing (compared with 9 percent in 1960). - HDB housing loans: concessionary interest rate currently 2.6 percent (set at 0.1 percentage point above the rate on CPF ordinary account balances). - Also offers loans at market rates for buyers not eligible for subsidized loans. - Outstanding HDB mortgage loans: S$64.2 billion (about 41 percent of GDP) as of June 2003. - HDB financed directly by the Ministry of Finance and through bond issuances. ### Markets — foreign exchange - Foreign exchange market: fourth largest in the world. - Foreign exchange daily turnover: - Averaged US$96 billion in 2002. - US$121 billion in the first nine months of 2003. - Trading composition: - Dominated by G3 currencies. - Spot and swap transactions: about 90 percent of total trading. - Remaining trading: forward, futures, and options contracts. - About 90 percent of total turnover by financial institutions (17 percent by Singapore-incorporated institutions). ### Markets — money and bond markets - Money market: - Liquid and dominated by interbank market in foreign currency. - Interbank market mainly short-term interbank deposits and lending denominated in foreign currency. - ADM important center for mobilizing interbank funds globally; most interbank loans in recent years directed to Europe. - SGS market: - Outstanding SGS volume: S$62 billion (39.8 percent of 2002 GDP) at end-September 2003. - Average daily trading volume: S$2.7 billion for the first nine months of 2003. - SGS repo average daily trading volume: S$2.6 billion for the first nine months of 2003. - Corporate bond markets (outstanding volume at end-June 2003): - Total outstanding volume: S$109.3 billion - Outstanding Singapore dollar corporate bonds: S$54.8 billion - Outstanding foreign currency-denominated bonds: about S$54.5 billion - Major issuers: large Singapore corporations (including GLCs), financial institutions, statutory boards. - Bulk of Asian dollar bonds: commercial paper and fixed rate notes with short maturities. - Singapore dollar corporate bond market dominated by fixed-rate bonds and notes. - Structured notes included asset-backed securities, bank subordinated debt, equity-linked notes, credit-linked notes, dual currency notes, interest rate linked notes, and collateralized loan obligations. - Secondary bond markets relatively illiquid as bulk of bonds are held until maturity. ### Markets — equity and derivatives - SGX formed in 1999 by merger of the Stock Exchange of Singapore and the Singapore International Monetary Exchange. - Trading divisions: - SGX-ST: Securities Trading Division (equities) - SGX-DT: Derivatives Trading Division (broad range of international futures and options) - Linkages: co-trading linkage with the Australian Stock Exchange; mutual offset system linkage with the Chicago Mercantile Exchange; joint venture with the American Stock Exchange for exchange traded funds. - Market metrics as of end-September 2003: - Total stock market capitalization: S$487 billion (313 percent of 2002 GDP). - 556 companies listed on the SGX-ST. - IPO activity: 44 new listings on SGX-ST during the first three quarters of 2003. - SGX-DT: average daily turnover in the first three quarters of 2003 increased by 7 percent year-on-year. ### Payment and settlement systems - Payment infrastructure: - MEPS: real-time gross settlement system (RTGS) for high-value interbank funds transfers and settlement of SGS. - MEPS handles about 95 percent of the total value of all electronic transactions and noncash payments in Singapore. - Retail clearing arrangements: Network for Electronic Transfers Singapore (Electronic Funds Transfer at Point of Sale, e-money and ATM networks) and Automated Clearing House operated by Banking Computer Services (checks and interbank GIRO transfers). - Recent infrastructure developments: - Check Truncation System fully operational in July 2003. - Payment and Settlement Systems (Finality and Netting) Act enacted December 2002 enabling participation of major local banks in CLS in December 2002. - Singapore dollar included as a CLS settlement currency in September 2003. - Work underway to clarify MAS’ role in payments and to enhance MAS’ oversight function. - Securities and derivatives clearing/settlement: - MEPS-SGS: central depository for Singapore government bonds and bills; offers RTGS on a delivery-versus-payment basis and linked to MEPS-Interbank Funds Transfer. - CDP (subsidiary of the SGX): clears and settles equities and private debt securities executed on the Exchange and OTC private debt securities. - Systems described as robust and not giving rise to major systemic risks. - Improvements planned: implementation of a SWIFT channel for MEPS-SGS and an intraday liquidity facility to improve cash-side liquidity. ### Regulation and supervision - Monetary Authority of Singapore (MAS) serves as both central bank and unified supervisory/regulatory authority for banks and nonbank financial institutions. - MAS oversight and regulatory developments: - MAS has developed a sound prudential and regulatory framework to effectively supervise the financial system. - On July 1, 2003, MAS took over responsibility for on-site inspection of SGX member firms from the SGX to enhance regulatory clarity. - Progress toward greater consistency in standards across banks, insurance companies, and securities firms. - SFA streamlined and consolidated supervision of firms active in securities and futures markets. - FAA consolidated and streamlined regulatory regimes governing provision of financial advisory services for investment products (including sale of unit trusts and life insurance). - SFA and FAA enhanced MAS’ enforcement powers and inspection rights. - Risk-based capital framework in place for banks and securities and futures intermediaries; to be applied to the insurance industry in 2004. *Source: _cr04104 - 51. Singapore has about 580 local and foreign financial institutions. They offer a (IMF PDF).* ### 75. Stress testing exercises were coordinated by the MAS and stress test exposure ### _cr04104 - 75. Stress testing exercises were coordinated by the MAS and stress test exposure ### Stress testing design and scope - Stress testing exercises were coordinated by the MAS and stress test exposure estimates were calculated directly by participating institutions. - Two scenarios were assumed: - Scenario 1: simulated global growth recession ("Global Weakness"). - Scenario 2: global growth recession with additional domestic pressures arising from terrorist attacks ("Global Weakness and Terrorism"). - Time horizon for shocks: one year; estimates reflect each participating institution’s condition at the end of a full year. - Stress test calculations are based on end-2002 data. ### Banking sector stress tests — coverage and methodology - Participating entities: - Three local banking groups and three foreign bank branches considered systemically important by the MAS based on: (1) the magnitude of non-bank deposits; (2) the magnitude of interbank borrowings; and (3) the importance of the bank in domestic payment system operations. - Stress exposures included all major bank and finance subsidiaries for local banks, and all positions booked and managed in Singapore for foreign bank branches. - Market risk stress estimates: - Included marked-to-market valuation effects of changes in equity, interest rate, and foreign exchange rate factors on all DBU and ACU trading book and foreign exchange positions, derivatives positions, and equity investments in the banking book. - Banking book interest rate risk calculated by simulating stress scenario effects on projected net interest income. - For foreign branch banks, trading risk estimates include all trading book positions and derivative assets booked and managed by the branch. - Credit risk exposure estimates: - Based on each bank’s entire banking book including all ACU and DBU book positions and material off-balance-sheet derivative positions and committed guarantees. - Internal bank guidelines consistent with MAS Notice 612 were used to reclassify credits following a stress shock to estimate loss exposures and specific loan loss provisions. - Corporate credit risk exposures were estimated by analysts using bank loan classification policies considering interest coverage, explicit guarantees, implicit support, and other measures of credit quality. ### Insurance sector stress tests — coverage and metrics - Participation: - A total of 10 insurance companies, deemed systemically important by the MAS, participated. - Participating companies represented about 85 percent of the domestic life insurance sector by assets and 77 percent by gross premium and 45 percent of the domestic general insurance sector by both assets and gross premiums. - Coverage: - Stress testing exposure estimates covered both the Singapore Insurance Fund and the Offshore Insurance Fund for each company and separately for life insurance and nonlife insurance as applicable. - Results: - Stress test results included estimates of their position against the minimum solvency margin requirements. - Additional variables for insurance stress testing (selected items from scenarios): - Corporate bond prices: Singapore and selected Asian countries -2.0 percent (Scenario 1), -7.0 percent (Scenario 2); Rest of the world -2.0 percent (Scenario 1), -3.0 percent (Scenario 2). - Receivables (outstanding premium and agents’ balances): -10.0 percent (Scenario 1), -20.0 percent (Scenario 2). - Loans to and other receivables from Manufacturing sector: -10.0 percent (both scenarios); Other sectors: -5.0 percent (Scenario 1), -10.0 percent (Scenario 2). ### Scenario assumptions (market and credit risk stress tests) — key variables (percent change per annum, unless otherwise noted) - Assumed real GDP growth rate: - Singapore: 0.0 (Scenario 1); -1.7 (Scenario 2) - Regional countries: 2.0; -2.5 - North Asian countries: 2.8; 2.8 - Advanced countries: 1.5; 1.5 - Singapore’s sectoral growth rates: - Manufacturing: -1.0; -2.0 - Construction: -2.0; -4.0 - Financial and business: -1.0; -3.0 - Commerce: 1.0; -2.0 - Transportation and communications: 2.0; 1.0 - Property prices (private residential): - Singapore: -10.0; -15.0 - Malaysia and Indonesia: -5.0; -15.0 - Thailand: -5.0; -10.0 - Rest of the world: -5.0; -5.0 - Singapore commercial and industrial: -10.0; -15.0 - Unemployment rate (percent of labor force) 2/: - Singapore: 5.5; 6.0 - Malaysia: 4.5; 5.5 - Indonesia: 9.0; 9.5 - Philippines: 11.0; 13.0 - Thailand: 4.0; 4.5 - Korea: 5.0; 5.0 - Taiwan Province of China: 6.0; 6.0 - Hong Kong SAR: 8.0; 8.0 - China: 6.0; 6.0 - Equity prices: - Singapore, Malaysia, Thailand, Indonesia, and the Philippines: -10.0; -20.0 - Rest of the world: -5.0; -5.0 - Risk-free interest rates (changes in basis points) 3/ — Singapore and selected Asian countries: - Short-term (< or = 3-months) 4/: -60.0; 150.0 - Medium-term (1 year): 0.0; 100.0 - Long-term (10 years): 0.0; 50.0 - Very long-term (>10 years): 0.0; 50.0 - Risk-free interest rates — Rest of the world 5/: - Short-term (< or = 3-months): -80.0; -80.0 - Medium-term (1 year): -20.0; -20.0 - Long-term (10 years): 0.0; 0.0 - Very long-term (>10 years): 0.0; 0.0 - Exchange rate (per S$; percent change): - Vis-à-vis regional, South Asian, and Latin American currencies: -1.0; 3.0 - Vis-à-vis North Asian currencies 6/: -1.0; -2.0 - Vis-à-vis other currencies 7/: 1.0; -3.0 Notes attached to scenarios (as stated): - All currency pegs (e.g., the ringgit peg to the U.S. dollar) are assumed to continue. - Rest of the world: the growth rate was assumed to be 2 percentage points above average of Q1–Q3 2002 (if quarterly data available) or 2.5 percentage points above 2001. - Selected Asian countries include Indonesia, Malaysia, Philippines and Thailand. - For scenario 1, the drop of 60 basis points was subject to a floor of 0.5 percent for the base rate. If the base rate at end-December 2002 were already lower than 0.5 percent, the December 2002 rate would be used. - Changes in short-and medium-term rates were subject to a floor of 0.001 percent in the base rate. - China, Korea, and Taiwan Province of China. - Includes advanced economies, Hong Kong SAR, and Malaysia. ### Summary assessments of observance of financial sector standards and codes — purpose and process - Purpose: - Assessments identified the extent to which the regulatory and supervisory frameworks are adequate to address potential risks in the financial system and provided priority areas for legislative revision and recommendations for improved financial regulation and supervision. - Peer review process and contributors: - Detailed assessments were undertaken based on a collegial peer review process as part of the FSAP by named experts for specific standards (Basel Core Principles; IOSCO; IAIS; Core Principles for Systemically Important Payment Systems; IOSCO-CPSS Recommendations for Securities Settlement Systems; IMF Code of Good Practices on Transparency in Monetary and Financial Policies; AML-CFT Standards). - Method: - Singapore authorities completed self-assessment questionnaires; responses and self-assessments were clarified and checked through discussions with authorities and market participants during missions. ### Basel Core Principles for Effective Banking Supervision — overview and main findings - Assessment basis: - BCP assessed using the Core Principles Methodology published by the Basel Committee on Banking Supervision. - Main sources: MAS self-assessment, relevant laws and regulations, supervisory guidelines, notices, circulars, inspection manual, examination reports, MAS internal documents, and discussions with MAS staff, commercial banks, and an accounting firm. - Market structure: - Of the 115 commercial banks: - 27 designated by the MAS as full banks - 38 as wholesale banks - 50 as offshore banks - The five local commercial banks, owned by three local banking groups, are all designated as full banks. - Foreign full banks are subject to restrictions not imposed on local full banks. - MAS role and powers: - MAS is Singapore’s central bank and unified financial sector regulator with duties including prudential oversight of banking and insurance industries, trading of securities and futures, supervision of investment advisory and fund management activities, and payment operations of banks and the Automated Clearing House. - MAS is empowered, but not obligated, to provide lender of last resort facilities to a bank if it determines such action is necessary to safeguard systemic stability. - Legal, accounting, and disclosure environment: - Singapore’s legal system follows the English common law tradition. - Statements of Accounting Standards (SAS) follow International Accounting Standards; Standards of Auditing based on the International Federation of Accountants. - MAS must approve a bank’s external auditor; auditors have a legal responsibility to report problems to the MAS. - Singapore banks face a statutory requirement for continuous disclosure under the SFA and listing rules of the SGX require disclosure of corporate governance practices and explanations of deviations from the Code of Corporate Governance. - Main findings and recommendations: - Overall assessment: MAS has established a sound prudential and regulatory framework and achieved a high level of compliance with Basel Core Principles. - Objectives, autonomy, powers, and resources (CP 1): - MAS Act, Banking Act, and implementing regulations empower MAS to license and supervise commercial banks, establish and enforce legal and prudential standards, impose fees, set budget and hire staff, and share information between supervisors. - MAS governance details: board of directors appointed by the elected President on Cabinet recommendation; directors’ term of office is three years. - Current Chairman of the MAS is concurrently the deputy prime minister and the Minister for Finance; Managing Director appointed by the President on recommendation of the Public Service Commission; MAS is self-financed and its budget is approved by the President. - The FSAP team recommends moving to a more conventional structure of separate responsibilities, or an alternative structure that recognizes potential conflicts of interest and incorporates transparent measures to minimize them, given the multiple official responsibilities of the Chairman could give rise to conflicts of interest. - Licensing and structure (CPs 2–5): - MAS is both licensing and supervisory authority; licensing process requires submission of ownership structure, strategic and business plan, financial statements, experience of board and management, risk management framework, and prior consent of home supervisor for foreign banks. - Prior approval of the Minister is required for holding shareholdings of 5 percent, 12 percent and 20 percent or more, or becoming indirect controller; MAS involved in evaluation. MAS approval required for equity investments exceeding 2 percent of capital funds (or other prescribed percentage) and for stakes above 10 percent voting rights/share capital. - Prudential regulations and requirements (CPs 6–15): - Prudential regulations are sound; capital adequacy rules broadly conform to the Basel Capital Accord for credit and market risks. - Legal minimum CARs are more conservative than the Basel Accord; MAS can impose higher capital requirements. - Credit, market, liquidity and other material risks are independently evaluated and verified through regular on-site examinations and off-site monitoring. - The definition of “closely related group” could be more comprehensive; law and regulations do not clearly state that all claims are to be included in large exposures. Some credit facilities related to Singapore’s exports and imports are not included in large exposures. - Methods of ongoing supervision (CPs 16–20): - MAS uses a risk-based supervision approach prioritizing based on bank risk profiles, combining on-site inspection and off-site monitoring. - Local banks are supervised on a consolidated basis with prudential limits imposed on a group basis. - External auditors review annual statutory returns; MAS reviews auditor reports and assesses auditor work during on-site examinations. Meetings with boards and senior management scheduled at least once a year; bilateral meetings with external auditors twice a year. - Information requirement (CP 21): - Records and reporting requirements based on Banking Act, Company Act, and MAS notices. Annual accounts must be audited and comply with Companies Act and SAS/Financial Reporting Standards. - Every bank required to publish latest audited annual financial statements with external auditor’s report and file them with the Registry of Companies and Business. - Formal powers of supervisors (CP 22): (section heading present; substantive text begins beyond provided excerpt) *Monetary Authority of Singapore; and Staff estimates.* ### 102. The Banking Act empowers the MAS to take actions against a bank if the bank is ### 102. The Banking Act empowers the MAS to take actions against a bank if the bank is ### Banking Act: supervisory powers and enforcement - The MAS may act if a bank is "unable to meet its obligations" or if the MAS is "of the opinion that the bank is carrying on its business in a manner likely to be detrimental to the interests of its depositors, creditors, or the public interest." - Powers available to the MAS include: - appoint a person to advise the bank in the proper conduct of its business; - assume control of and carry on the business of that bank; or - direct some other person to assume control of and carry on the business of that bank. - The MAS may change or revoke any existing conditions of a license or impose conditions. - Criminal liability for senior management: - "A director, managing director, or manager of a bank in Singapore who fails to take all reasonable steps to secure compliance by a bank with the provisions of the Banking Act or any other written law applicable to banks in Singapore or to take all reasonable steps to secure the accuracy and correctness of any statement submitted shall be guilty of an offense and shall be liable on conviction to a fine or imprisonment." ### Cross-border banking (CPs 23–25) - Supervision approach: - The MAS supervises local banks on a consolidated basis including the operations of their overseas branches and subsidiaries. - The MAS maintains various information sharing arrangements with host and home country supervisors. - As home supervisor, the MAS conducts on-site examinations of local banks’ major overseas operations and holds annual bilateral meetings with banking supervisors in those jurisdictions. - The MAS applies the same risk-based supervision approach, examination standards and reporting requirements in supervising foreign bank branches as local banks. - Legal and informational provisions: - The Banking Act permits on-site examinations to be conducted by home supervisors and allows the MAS to share supervisory information with foreign home supervisors, provided that confidentiality is protected. ### Recommended Action Plan to Improve Compliance of the Basel Core Principles (selected) - Independence and Adequate Resources (CP 1(2)) - "The multiple duties of the Chairman of the MAS should be re-assessed." - Clarify the role of the Minister in the merger application approval process. - The term "national interest" could be more clearly defined. - Large Exposure Limits (CP 9) - "The definition of 'closely related group' should be more comprehensive and include all companies under common control." - "Laws and regulations should be amended to provide that exposures explicity include all claims and transactions." ### Authorities’ Response (banking) - MAS acknowledges potential improvements regarding the Chairman holding multiple responsibilities but reiterates prudential licensing and supervision "has not been compromised." - Safeguards cited: - legal and institutional safeguards; - long tradition of sound licensing and supervisory decisions; - increasingly transparent environment. - On national interest and ministerial role: - "The national interest issues that the Minister considers, apart from the MAS’ prudential evaluation of merger or substantial shareholding applications, have been publicly defined and explained." - "Section 15C of the Banking Act also stipulates that the Minister cannot set aside prudential considerations in approving applications to acquire substantial shareholdings in a locally incorporated bank." - Large exposures and reporting: - "The MAS requires banks to have systems and controls in place to aggregate and manage their exposures to a single group borrower, including the parent and subsidiary companies." - Banks report to the MAS off-balance sheet items such as currency and interest rate swaps and other derivatives. - "The MAS is reviewing the large exposures limit to address the issues raised." ### IAIS — Insurance Core Principles: assessment approach - Evaluation basis: - Analysis of existing and proposed legislation (Insurance Act, MAS Notices, MAS Guidelines, etc.); - Discussions with the MAS and representatives from companies, industry associations, professions, and market analysts; - Information on supervisory practices and detailed market data on sector performance and trends. ### Institutional and market context for insurance (selected statistics) - In 2001, Singapore’s domestic market: - total insurance premiums of US$4 billion; - ranked 34th in the world, 9th in the Asian region, and 2nd in South East Asia. - Premiums per capita: US$959 (ranked 24th in the world and 5th in the region). - Insurance penetration (gross premiums written/GDP): 4.6 percent (below world average 7.8 percent and regional average 7.6 percent). - Life Insurance assets: grew from 75 percent of the sector total in 1996 to 86 percent in 2002. - There are 51 captive insurance companies which are supervised. ### Numbers of Insurers and Reinsurers, at end-2002 (table summary from source) - Direct Insurers — totals listed: - General insurance: Locally Owned 8; Locally Incorporated 17; Branch 18; Total 43. - Life insurance: Locally Owned 2; Locally Incorporated 3; Branch 1; Total 6. - Life and general: Locally Owned 4; Locally Incorporated 2; Branch 1; Total 7. - Total (Direct Insurers): 14 Locally Owned; 22 Locally Incorporated; 20 Branch; 56 Total. - Total excluding runoff (Direct Insurers): 13 Locally Owned; 20 Locally Incorporated; 17 Branch; 50 Total. - Reinsurers — totals listed: - General insurance: Locally Owned 5; Locally Incorporated 4; Branch 17; Total 26. - Life insurance: Locally Owned 0; Locally Incorporated 0; Branch 1; Total 1. - Life and general: Locally Owned 0; Locally Incorporated 0; Branch 9; Total 9. - Total (Reinsurers): 5 Locally Owned; 4 Locally Incorporated; 27 Branch; 36 Total. - Total excluding runoff (Reinsurers): 1 Locally Owned; 2 Locally Incorporated; 23 Branch; 26 Total. - Additional note: "The life insurance offshore and reinsurance sectors are immaterial." - For nonlife insurance, the offshore sector represented "just under 20 percent for direct insurers and 80 percent for reinsurers in terms of assets." ### Preconditions and supervisory capacity for insurance - General observations: - "All preconditions for effective supervision are in place." - Legal system: well-established principles, high standards of professionalism and integrity. - Institute of Certified Public Accountants of Singapore ensures published financial statements comply with International Accounting Standards. - Actuaries: qualifications mainly from professional associations in the United Kingdom, North America, and Australia; small pool of resident actuaries supplemented by head office actuaries for foreign branches and overseas consulting firms. - Singapore Actuarial Society has a Code of Conduct, a Disciplinary Scheme, and in 2002 introduced provisions on professional standards and guidance notes. ### Main findings on insurance supervision (summary) - High degree of observance with IAIS Core Principles; "Major steps which are underway to further improve the supervisory system" are noted. - Organization and resources: - Responsibility for supervision lies with the MAS, mostly with the Insurance Supervision Department. - MAS Board appointments made by the President of Singapore; traditionally MAS Chairman has been the Minister-in-charge. - MAS is financially independent and sets its own budget; legal protection provided for supervisory duties in good faith. - Insurance Supervision Department employs sufficient and highly qualified staff and uses external experts as needed. - Licensing: - "No person may carry on insurance business unless properly registered." - Comprehensive licensing criteria; prior approval required for amendments, capital reductions, acquisitions of 20 percent or more of voting rights, mergers, establishment of new operations, and key appointments. - Corporate governance and internal controls: - Corporate governance rules currently apply only to listed insurers. - Boards of life insurers required to oversee investment policy and asset risk management functions. - Forthcoming Notice on Corporate Governance and Proposed Guidelines on Sound Risk Management Practices expected to significantly improve the framework. - Prudential rules and solvency: - Comprehensive standards on investments addressing diversification, limits on asset categories, asset admissibility, and single counterparty exposures. - MAS empowered to make rules regarding financial instruments and accounting and valuation rules. - Law specifies technical provisions for life and general insurance and requirements for actuarial approval; MAS can require provisions to be increased. - "Minimum requirements for the calculation of life technical provisions are set out in the law. The interest assumption specified seems high given current economic circumstances." - Defined capital margin requirements reflect size and risk; MAS can intervene when capital falls below required amount. - Solvency requirements are not assessed on a group basis. - Business volume-related requirement for nonlife: lower for reinsurers than for direct insurers. - A risk-based capital framework expected to be introduced in 2004 is "a significant improvement." - Reinsurance: - Appropriate rules generally in place; no provisions on exposure limits towards single reinsurers or reinsurance groups. - Market conduct: - Key functionaries must possess necessary knowledge, skills, and integrity. - Insurers explicitly agree to treat customers fairly. - On-site inspections of market conduct regularly conducted. - As of 2003, the Ombudsman was replaced by the Insurance Dispute Resolution Organization with wider responsibilities. - Monitoring, inspection, and sanctions: - Comprehensive powers to set reporting scope and frequency and to seek information. - Monitoring framework based on annual audited financial statements and annual and quarterly reports. - On-site inspections undertaken; MAS limited in power to perform on-site inspections in nonfinancial institutions to which insurers have outsourced functions. - Wide range of powers of intervention and sanctions available. - Cross-border operations and cooperation: - International insurers’ establishments, insurance groups, and conglomerates are licensed and supervised. - Subsidiaries, joint ventures of foreign companies, and foreign branches are subject to solvency supervision in Singapore. - A license can be refused or additional conditions imposed where concerns exist about parent not being subject to effective home supervision. - Legal requirements for information exchange, assistance, and cooperation with foreign supervisors prescribe preconditions including reciprocity. - MAS can exchange and hold confidential information with appropriate expectations; "Comprehensive confidentiality requirements exist for officers." ### Recommended Action Plan to Improve Observance of IAIS Insurance Core Principles (summary) - Corporate Governance and Internal Controls (CPs 4–5) - Continue ongoing reforms, in particular the Notice on Corporate Governance and the Guidelines on Sound Risk Management Practices. - Prudential Rules (CPs 6–10) - Establish detailed rules on use of outstanding premiums, agents’ balances, outstanding investment income and other receivables, motor vehicles and computer equipment as assets to cover insurance liabilities and solvency margin requirements. - General rules on assets in offshore insurance funds and Shareholders’ Funds, including on derivative use. - Review minimum valuation rules for life insurance provisions. - More precise rules on treatment of reinsurance recoveries for solvency purposes and counterparty risk. - Apply solvency margin requirements to both offshore insurance funds and Singapore insurance funds and revisit to avoid regulatory arbitrage. - Clearly elaborate allocation of any available solvency margin between funds in wind up situations. - Market Conduct (CP 11) - Progress implementation of the Notice on Corporate Governance regarding internal complaint procedures. - Monitoring, Inspection, and Sanctions (CPs 12–14) - Improve reporting of off balance sheet items. - Give MAS authority to perform on-site inspections in institutions to which companies have outsourced functions. ### Authorities’ Response (insurance) - MAS will continue reforms: corporate governance notice and the Risk-Based Capital framework. - Proposed Risk-Based Capital framework highlights: - Application of explicit risk charges on various asset classes and concentration limits in all funds. - GAAP in Singapore will continue to apply; provisions set aside based on GAAP. - New valuation rules: insurers to determine technical provisions using best estimate values for all expected future income and outgo, with an additional provision for adverse deviation. - Reinsurance recoveries subject to credit and concentration risk charges; insurers required to take into account the probability of reinsurance recovery. - Framework will address regulatory arbitrage. - Reporting and off-balance sheet items: - MAS does not stipulate specific requirements to submit information on off-balance sheet activities (except derivatives), but Statements of Accounting Standards in Singapore require such information to be included in the insurer’s annual financial accounts, a copy of which is extended to the MAS. - Other initiatives: - Reviewing extension of on-site inspections to companies that have accepted functions outsourced by insurers (noting functional outsourcing is currently not common). - Plan to sign more Memorandums of Understanding with foreign supervisors to boost information exchange and cross-border cooperation. ### IOSCO — Securities regulation: assessment scope and market context - Assessment covers implementation of IOSCO Objectives and Principles of Securities Regulation for securities and derivatives products offered in Singapore. - Assessment draws on: - Relevant laws and regulations; - A self assessment by the MAS based on IOSCO-designed surveys; - Self-assessment of achievement of the CPSS-IOSCO recommendations for securities settlement systems by the CDP; - Interviews with MAS staff and consultations with sector and capital markets experts, including SGX, CDP, SGX-DC, CPF, and several Government Linked Companies. - Market structure and scale: - Singapore’s securities markets are "among the most well-developed and sophisticated in the world." - In 2002, market capitalization of the SGX Mainboard and Sesdaq was "188 percent of GDP." - The authorized securities and derivatives exchanges were demutualized and merged in 1999 and are held through the SGX, which is a listed company. - The futures market operates as open outcry as well as an electronic market. - The MAS owns and operates an electronic interbank funds transfer system designed for real time gross settlement. - Securities and futures clearing currently occur through commercial settlement banks. *Source: IMF Financial Sector Assessment Program (FSAP) material as provided in the supplied content unit.* ### 129. At end-2002, there were a total of 525 listed companies of which 385 were listed on ### _cr04104 - 129. At end-2002, there were a total of 525 listed companies of which 385 were listed on ### Market structure and size - At end-2002, there were a total of 525 listed companies: - 385 listed on the main board - 116 on the Sesdaq - 6 on Xtranet - 18 on CLOB International - Total overall market capitalization: S$504 billion. - Only a portion of the capitalization can be characterized as free float. - Outstanding Singapore government debt securities: S$53 billion in 2002. - Outstanding corporate debt: S$89 billion in 2002. - Principal holders of debt securities are domestic. - Singapore recently offered a 15-year government benchmark security. - The secondary market in debt securities is in its developmental stages. ### Managed funds and CPF investments - At end-2002, total assets under management: S$344 billion. - Unit trusts totaling approximately S$14 billion. - At the end of June 2002, S$11 billion of the CPF was invested in equities: - 20 percent of this CPF equity investment was invested indirectly through unit trusts. ### Regulatory framework and the MAS - Regulation and supervision of securities markets, intermediaries, and collective investment schemes are entrusted to the MAS. - The MAS is Singapore’s central bank and unified financial sector regulator with duties to: - Foster a sound and progressive financial sector. - Prudential oversight of all credit institutions, the insurance industry, the trading of securities and futures. - Supervision of investment advisory and fund management activities. - The MAS is empowered, but not obligated, to provide lender-of-last-resort facilities to a bank if necessary to safeguard systemic stability. - Singapore does not impose controls on capital flows, but has size requirements for domestic commitment of funds by offshore funds providers. - Singapore enforces the rule of law under a tested common law system and consistently receives among the highest ratings for lack of corruption. ### Main findings on observance of IOSCO Principles (summary by topic) - Overall assessment: - The framework for oversight and regulation of securities markets, intermediaries, issuers, and collective investment schemes is well developed, and sophisticated. - Regulator (Principles 1–5): - The MAS is legally and institutionally independent of the executive and legislative branches and accountable to the public. - Responsibilities for securities regulation are stated in the SFA of 2001, the FAA, the Exchanges (Demutualization and Merger) Act, and related regulations. - MAS has prudential and conduct-of-business responsibility for intermediaries requiring Capital Markets Services Licenses. - Greater disclosure of the MAS’ operating procedures would enhance accountability and transparency given interrelationships with government and statutory boards. - MAS has staff, powers, expertise, and resources to conduct effective regulation; consultation processes with industry and public are in place and sound. - Self-regulatory organization (Principles 6–7): - Use of self-regulation complies with IOSCO principles. - SGX-ST and SGX-DT are recognized by statute as front line regulators of trading activities. - MAS has enhanced supervisory arrangements since SGX demutualization, including testing the quality of the exchange front line program. - MAS cannot review access denial determinations; arrangements to avoid conflicts of interest could be more clearly specified. - Enforcement (Principles 8–10): - MAS has comprehensive inspection, investigation, and surveillance powers and a routine inspection cycle. - Developing an enhanced risk-based inspection and oversight program for intermediaries and markets. - MAS powers include obtaining data and documents, seeking compliance, imposing administrative sanctions, seeking court orders, suspending trading, entering enforceable settlements. - Under the SFA, MAS may seek civil monetary penalties for fraud or misrepresentation with consent of the Public Prosecutor; can revoke, suspend or condition licenses and make criminal referrals. - Cooperation (Principles 11–13): - Law permits MAS to share public information and non-public information subject to conditions in the SFA. - MAS may cooperate informally but prefers Memorandum of Understanding; signatory of the Boca Raton Declaration. - Assistance not limited by dual criminality, though considered; reciprocity may be considered. - Powers exist to provide full, effective, and timely assistance to foreign securities regulators. - Issuers (Principles 14–16): - Initial public offerings and continuing disclosure requirements provide timely, adequate, and accurate disclosure. - Prospectus disclosure requirements are state of the art. - Issuers, directors, and underwriters subject to criminal and civil liability for false or misleading prospectuses or nondisclosure. - Company law and listing rules accord fair and equitable treatment to all shareholders. - The Take-Over Code provides protections to listed Singapore companies and unlisted public companies with 50 or more shareholders and net tangible assets of S$5 million or more. - Singapore generally follows international auditing standards. - Quarterly financial reporting required for listed companies above S$75 million. - Collective investment schemes (Principles 17–20): - Requirements for authorization of CIS and regulation of operators exist. - All domestic CIS are in the form of unit trusts (law does not prohibit other legal forms). - MAS recognizes foreign investment schemes subject to conditions. - Inspection powers ensure trustees exercise due diligence. - Standards of disclosure and powers to review/halt offers similar to issuers of shares and debentures. - MAS should require periodic reporting of asset value and ensure operators have systems to ensure correct calculations of net asset value. - MAS should clarify types of permitted offerings and make requirements more accessible and ensure sufficient means to identify potential violations. - Market intermediaries (Principles 21–24): - Single modular licensing framework for securities and futures market intermediaries adopted. - SFA regulates intermediaries conducting regulated activities; FAA regulates intermediaries providing financial advisory services. - MAS has adopted a risk-based approach to supervising licensed intermediaries. - Capital requirements for licensees will be largely based on analysis underlying the Basel Core Principles. - New capital rule supersedes an adjusted net capital rule and is being phased in conservatively to test potential impact on capital. - Holders of Capital Markets Licenses must observe customer protection procedures. - Secondary market (Principles 25–29): - Singapore has a sophisticated exchange and products structure. - Under SFA, trading systems must be approved as an exchange or recognized as a Recognized Trading Systems Provider. - MAS has a supervisory framework for oversight of SGX. - SFA promotes transparency by requiring exchange rules to provide for recording and publication of trade data. - MAS and SGX have advanced electronic surveillance systems. - SGX-ST and SGX-DT have mechanisms for surveillance and limiting large exposures and isolating defaulting firm risk. - There is substantial contra-trading (trading within the settlement period); this could pose financial risks and should be kept under review. - Clearing and settlement systems (Principle 30): - Singapore rated fully in compliance with IOSCO principles for futures clearing and settlement systems. - Clearing and settlement systems of the SGX are subject to MAS regulatory oversight and are designed to be fair, efficient and reduce systemic risk. ### Recommended Plan of Actions (by principle group) - Principles Relating to the Regulator (CP 1–5): - Greater disclosure of the operating procedures that guide implementation of securities regulatory policies to enhance accountability and transparency. - Principles of Self-Regulation (CP 6–7): - MAS should keep exercise of exchange access denial and exercise of exchange supervision under careful review. - Principles for the Enforcement of Securities Regulation (CP 8–10): - Protocols for cooperation with criminal authorities should be evaluated on a results basis in practice and refined if necessary. - Principles for Cooperation in Regulation (CP 11–13): - MAS should continue to demonstrate a commitment to cooperate with regulatory counterparts and keep under review how legal predicates to sharing operate in practice. - Principles for Collective Investment Schemes (CP 17–20): - MAS should require periodic reporting of net asset value and assure itself that a CIS operator has systems in place to ensure correct NAV calculations. - MAS may wish to consider promoting other types of CIS vehicles than unit trusts. - Principles for Market Intermediaries (CP 21–24): - MAS should evaluate the quality and quantity of risk capital produced by the new risk-based capital rule in practice and ensure ongoing development of expertise and techniques to use refined measures for preventative action and customer fund protection. - Principles for the Secondary Market (CP 25–30): - MAS should continue to monitor trading and follow up on unusual activity to prevent misuse of error accounts or adverse consequences of contra trading, and assure that default rules and guidance are reasonably accessible to market users. ### Authorities’ response - Singapore authorities agreed with main findings and recommendations. - MAS will be issuing requirements on the method and frequency of CIS valuation by end-2003. - MAS has posted a table on its website on different types of CIS which can be offered in Singapore and will issue a consumer handbook on rights of recourse. - MAS notes its inspection and enforcement programs have been recently modified but asserts a credible prior program and that improvements are designed to better target abuse and provide appropriate oversight. - MAS notes current legislation allows flexible formats or structures of domestic CIS. - MAS is actively addressing the issues raised and has pursued legislation to meet or exceed international standards on information sharing, accounting matters, and market abuse powers and procedures. ### Payments and Settlement Systems — MEPS (CPSS Core Principles) - Institutional setting and scale: - MEPS used for interbank payments transfers, multilateral netting of checks and GIRO retail transfers, and settlement of SGS on a delivery versus payment basis. - Turnover in MEPS is around 95 percent of the total value of all electronic payment transactions and noncash payments in Singapore. - Annual turnover in 2001 was more than 75 times gross domestic product. - On an average day, electronic funds transfers of some S$40 billion are processed on a real time, gross settlement basis. - Settlement finality and irrevocability: - Each payment order in MEPS is settled in real time if the sending bank has enough balances with the MAS. - A settled payment is irrevocable and final under all circumstances, even in the case of a bankruptcy during that day. - Funds received can immediately be used without risk by the beneficiary bank for its own payment obligations. - Legal foundation (CP I): - Legal basis of MEPS is Section 29A of the MAS Act and the Payment and Settlement Systems (Finality and Netting) Act. - MEPS is a designated system under the Finality and Netting Act. - Operational rules and a commercial service agreement bind participants. - Accounting records produced electronically and electronic signatures have the same evidentiary value as written documents. - Risk understanding and management (CPs II–III): - MEPS is a real-time gross-settlement system; each settled transfer is final and irrevocable, eliminating certain bilateral credit-use risks. - Relatively high minimum cash reserves available intraday contribute to sufficient liquidity. - MAS monitors liquidity flows and may provide additional liquidity via primary dealers if a gridlock is imminent. - Banks can manage waiting queues in real time by changing payment priorities; information on unsettled queued transfers is provided to receiving banks to facilitate intraday liquidity management. - Planned upgrade to MEPS+ envisages an automatic intraday repo facility enabling banks to borrow intraday from the MAS. - Two potential influences on MAS intraday liquidity provision: - (i) the global trend towards lowering of binding reserve requirements; and - (ii) the inclusion of the Singapore dollar into CLS, which may increase time-sensitiveness of interbank payments. - Settlement (CPs IV–VI): - MEPS provides prompt and final settlement during the day if the sending bank has sufficient liquidity. - Transfers not immediately settled are placed in a waiting queue until liquidity is obtained. - MEPS settles in central bank money; participants are not exposed to settlement bank risks. - Security, operational reliability and contingency arrangements (CP VII): - MEPS is highly reliable with state of the art contingency measures. - Data integrity, authorization, authentication, nonrepudiation, and confidentiality are assured. - Risk assessment conducted once every three years and whenever significant system changes occur. - Internal Audit Department performs regular EDP audits. - MAS has an Audit Committee of three nonexecutive board members focusing on internal/external controls and financial reporting integrity. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 153. Efficiency and practicality of the system (CP VIII). MEPS recovers most of its ### _cr04104 - 153. Efficiency and practicality of the system (CP VIII). MEPS recovers most of its ### Efficiency and practicality of the system (CP VIII) - MEPS recovers most of its costs (all operational costs are covered and part of the capital costs). - MEPS offers an efficient set of functional facilities that promotes the smooth function of the system and enhances liquidity management by the participants. - Operational limitations: - Straight through processing for participants is hampered by the use of nonstandardized message types and the host front-end design of the system. - Work is under way to link the system to the SWIFT network and to introduce standardized SWIFT message types. ### Criteria for participation (CP IX) - Access policy: - Access is open to all banks active in Singapore, excluding Merchant Banks. - Access criteria have been broadened to allow regulated entities of systemic importance (e.g., the CDP Securities Settlement systems) to become members. - The participation of CDP in the near future will make it possible to settle securities transactions done on the SGX-ST in central bank money. - Procedures: - The criteria to suspend or terminate access are explicitly enumerated in the Service Agreement contracted bilaterally between the MAS and each participant. ### Governance of the payment system (CP X) - Ownership and oversight: - MEPS is 100 percent owned by the MAS. - Internal and external auditors perform regular EDP-audits. - An Audit Committee is charged with the adequacy of MAS internal controls, the coverage and results of internal and external audits and the integrity of the financial reporting. - Stakeholder forum and incentives: - Under the auspices of the Association of Banks in Singapore, a forum exists for gathering opinions and feedback from participants on the operation of MEPS. - A code of conduct codified in the by-laws of the Association gives incentives to participants to submit portions of their daily payments to be settled before certain points in time, significantly promoting throughput in MEPS. ### Central Bank responsibilities in applying the CPSIPS - Legal and institutional framework: - MAS payment systems objectives derive from the MAS Act: “fostering a sound and progressive financial service sector.” - MAS has legal powers to oversee retail payment systems provided by the Singapore Clearing House Association. - Work is under way to formalize and broaden the legal scope of the oversight function and a new payment law will be drafted. - In April 2003, a consultation paper was published outlining objectives and main policies under the proposed oversight framework. - Organizational arrangements: - The oversight function is undertaken by the Specialist Risk Supervision Department, which is not involved in MEPS operations. - MAS actively interacts with other central banks and is member of the G-10 Governors’ Basel-based Committee on Payment and Settlement Systems (CPSS). ### Recommended Action Plan to Improve Observance of the CPSS Core Principles for Systemically Important Payment Systems (excerpt) - Legal foundation (CP I): - To reinforce the legal basis of all retail payment systems that clear on a multilateral basis and settle the outcome of this netting in MEPS by designating these systems under the Payment and Settlement System (Finality and Netting) Act. - Understanding and management of risks (CPs II–III): - To amend Singapore’s law and to exempt explicitly collateralized loans in the form of repos from the registration under Article 131 of the Companies Act when an automatic intraday liquidity facility will be introduced in MEPS. ### Authorities’ response (payment systems oversight) - MAS acknowledges recommendations and areas for enhancement. - MAS considers the check and GIRO clearing systems to be of system-wide importance and intends to designate these systems under Payment Systems Oversight Act, expected to come into force in the first quarter of 2004. - At a later stage, when robust risk management arrangements such as loss sharing are in place, MAS will consider designating check and GIRO clearing systems under the Finality and Netting Act. - On the recommendation regarding repos, MAS refers to its comments on the MEPS-SGS Assessment under the CPSS-IOSCO Recommendations for Securities Settlement System. ### CPSS-IOSCO Recommendations for Securities Settlement Systems — Assessment approach - Scope: - Reviews observance of RSSS for two securities settlement systems in Singapore: MEPS-SGS (RTGS for SGS) and CDP (corporate bonds and equities). - Methodology: - Based on self-assessments by MAS and CDP, relevant laws, a legal opinion from the Attorney-General’s Chambers, and discussions with MAS, SGX, CDP, and market participants. ### Securities settlement systems infrastructure — Key facts - Market separation: - Separated markets for government securities (SGS) and for equities and private debt. - MEPS-SGS: - Wholly owned and operated by MAS. - Facilitates instantaneous and irrevocable transfer of SGS on a delivery versus payment basis. - MEPS-SGS is linked to MEPS. - Only banks can participate directly in MEPS-SGS. - Secondary market concentrated around eleven primary dealers. - SGX subsidiaries: - SGX-ST operates the listing and trading market. - CDP undertakes custody, clearing and settlement; there are 1.1 million direct accountholders. - CDP clears and settles SGX-ST transactions and offers settlement for OTC private debt via its Debt Clearing and Settlement System, linked to MEPS. - Settlement modes: - CDP settles trades in a real time gross system on a delivery versus payment basis and in central bank money. ### Main findings: MEPS-SGS - Risk elimination and system design: - MEPS-SGS eliminates principal risk by providing an adequate delivery versus payment mechanism. - MEPS-SGS reduces systemic risk and liquidity risk by offering a RTGS facility. - No major vulnerabilities identified. - Settlement cycle and efficiency improvements: - The normal settlement cycle is no longer than two days. - Settlement normally takes place on T+1; the system supports same day settlement. - Work is underway to implement a SWIFT-channel and introduce international standard message types and procedures. - Liquidity on the cash side will be improved in the near future so participants can conduct an intraday repo with MAS for settlement liquidity. - Legal basis: - Legal basis is predominantly sound; participants and end investors are not exposed to custody risk. - MAS emphasizes use of PSA/ISMA Global Master Repurchase Agreement for repos. - Further strengthening of legal framework for repos, collateralized loans and securities lending might modernize the SGS-market. - Clearing and settlement procedures: - Trade confirmation and matching takes place immediately after the trade. - Proprietary network currently used with SWIFT look-a-like message types; transition to standardized SWIFT communication is under way. - Settlement risk and controls: - RTGS design (delivery versus payment; BIS terminology: model 1, gross-gross). - All government securities are dematerialized and transferred in book-entry form only. - MAS neither acts as a central counterparty nor offers multilateral netting services. - System is reliable and robust with appropriate contingency measures; data integrity, authorization, non-repudiation and confidentiality are assured; systems audits and risk-assessments are conducted regularly. - Regulation and oversight: - MAS organized to prudently oversee MEPS-SGS with clear division of tasks between departments. - FSAP team recommends MAS publish an oversight framework document for securities settlement systems and MAS’ approach to administration. ### Recommended Actions to Improve Observance of MEPS-SGS with CPSS-IOSCO RSSS (summary) - Legal issues and custody risk: - Study whether the legal framework for securities lending and borrowing should be strengthened, including defining legal immunity of securities blocked in MEPS-SGS and in CDP within the framework of a settlement procedure. - Ensure the framework provides the best possible basis for sound management of market risk and substitution of collateral and ensures legal risk of recharacterization as a collateralized loan is eliminated under all circumstances for at least standardized repo contracts. - Regulation and oversight: - Publish a document on the oversight framework for securities settlement systems in Singapore and MAS’ approach to its administration. ### Main findings: Central Depository Private Limited (CDP) - Operational robustness: - CDP has a robust system compliant with international recommendations for clearing and settlement of stock exchange transactions; it can settle in a T+3 settlement cycle. - CDP has robust financial buffers (clearing fund) and adequate liquidity arrangements to ensure timely settlement even if large clearing members fail to settle. - System is operationally reliable with adequate contingency measures. - Vulnerabilities: - Issues to address, especially failed deliveries of securities on the due date. - Legal basis: - Predominantly sound but with minor improvements possible. - Protection of end-investors using a custodian or depository agent might be uncertain; an amendment of the Companies Act to broaden client protection against custodian default is in preparation. - Legal basis for delivery versus payment could be improved by giving legal immunity to blocking of securities during settlement procedures. - CDP should evaluate relevancy of legal framework for other jurisdictions. - Risk management: - CDP as central counterparty has sufficient means to fulfill obligations if a large clearing member fails on the cash side. - Lack of procedure to check availability of securities before settlement of the cash leg creates risk because CDP allows securities overdrafts; this practice is not in line with international standards and could result in complex legal problems. - Settlement agent exposure: - CDP uses United Overseas Bank as settlement agent and is exposed to settlement or deposit risk. - FSAP team recommends CDP open an account in MEPS and settle directly to the account of each clearing member; this change is already under way. - Organizational arrangements: - Possible tension between needs of CDP and clearing members; recommend defining clear public objectives of CDP as an infrastructure provider and assess competitive balance with Depository Agents. - Regulation and oversight: - Recommend MAS publish a document on the oversight framework for securities settlement systems in Singapore and MAS’ approach to its administration. - Cross-border links: - CDP has links with central securities depositories in the United States, Japan, and China; settlement in U.S. dollar is possible. - Links are not used for cross border trades between residents of Singapore and abroad. - Recommend MAS study whether conflict of law rules under private international law in Singapore should be changed to ensure Singapore law applies to foreign securities held via CDP or global custodians based in Singapore. ### Recommended Actions to Improve Observance of CDP with CPSS-IOSCO RSSS (summary) - Legal issues and custody risk: - Promote a sound legal basis for delivery versus payment by defining legal immunity of blocked securities in CDP. - Evaluate relevancy of legal framework in other jurisdictions relative to CDP’s operations. - Risk management: - Eliminate principal risk CDP is exposed to in case of short selling and do not permit securities overdrafts in these situations. - Until procedures are adapted, stress tests should take potential principal risk into account. - Organizational arrangements: - Define clearly the public interest of the clearing and settlement infrastructure and give more attention to this within oversight framework for CDP. - Study whether CDP fairly competes with Depository Agents regarding custody services and whether the system optimally services clearing members’ risk management needs. - Regulatory and oversight issues: - Publish a document on the oversight framework for securities settlement systems and MAS’ approach to its administration. - Cross-border links: - Study adaptation of conflict of law rules with respect to foreign securities held via a CDP account or through a global custodian based in Singapore. ### Authorities’ response (securities settlement systems) - General view: - Authorities note assessment is thorough and provided positive assessments that MEPS-SGS and CDP are robust and reliable, with no major vulnerabilities. - Authorities agree identified risks can be effectively managed and do not pose a material impact to system safety and soundness. - Legal framework: - Authorities agree legal basis is predominantly sound; minor improvements could enhance the legal framework. - MAS, with other agencies, is reviewing the Hague Convention on law applicable to certain rights with respect to securities held with an intermediary. - On CDP principal risk: - Authorities note CDP successfully settles more than 99 percent of trades on T+3 and has robust risk management to mitigate principal risk from the small percentage of failed trades. - Authorities will discuss FSAP risk management recommendations with CDP. - Oversight transparency: - MAS states it has a transparent oversight framework for securities settlement systems. - CDP is regulated under the SFA and subsidiary legislation; proposed regulatory oversight objectives and policies for MEPS are set out in the Consultation Paper for the Payment Systems Oversight Act (published in April 2003). - MAS departments responsible for MEPS-SGS and CDP collaborate extensively, including through the Payment and Settlement Steering Committee. - Authorities are agreeable to publishing the framework for oversight of securities settlement systems in Singapore. *Source: IMF Financial Sector Assessment documentation as presented in the provided content unit.* ### 181. The MAS was established in 1971 by the MAS Act 1970, under which it is ### _cr04104 - 181. The MAS was established in 1971 by the MAS Act 1970, under which it is ### Monetary policy framework and implementation - The MAS was established in 1971 by the MAS Act 1970 and is responsible for the formulation and implementation of monetary policy. - Legislative objective: "to promote, within the context of the general economic policy of the government, monetary stability and credit and exchange conditions conducive to the growth of the economy." - MAS mission and publications clarify the ultimate objective as maintaining price stability to promote sustainable growth. - Monetary policy is centered on management of the exchange rate: the Singapore dollar is managed against a basket of currencies of Singapore’s major trade partners and competitors. - The trade-weighted exchange rate index (TWI) is allowed to fluctuate within a target policy band which is not fully disclosed. - The policy stance for the TWI is reviewed on a semi-annual basis to ensure consistency with economic fundamentals and market conditions. - The MAS publishes a semi-annual Monetary Policy Statement and a Macroeconomic Review in conjunction with each statement; the Monetary Policy Statement announces the policy stance in terms of some of the key parameters of the band (slope and mid-point). - The Monetary Policy Statement provides a chart of the TWI for the past 12–18 months. ### Transparency, disclosure, and accountability — findings - Overall assessment: MAS has an enviable record in achieving monetary policy objectives, with a long period of low inflationary growth and a prudently operated and supervised financial sector. - Significant steps taken recently to increase transparency; much of the framework, instruments, and targets are publicly disclosed. - Remaining confidentiality that affects transparency and accountability: - Neither the weights used in the TWI nor the precise limits of the band are disclosed. - The extent and magnitude of MAS foreign exchange interventions are not disclosed on a frequent or timely basis. - Neither the precise limits of the band, its precise midpoint, nor the TWI currency weights are disclosed, creating potential uncertainty about implications of exchange rate movements. - MAS is an SDDS (IMF Special Data Dissemination Standard) subscriber; MAS discloses its balance sheet on a preannounced schedule and maintains a public information service with an advance release calendar. - The MAS does not release information on aggregate foreign exchange market interventions on an ongoing or timely basis. - Financial statements are released in the MAS Annual Report and are subject to external audit by the Auditor-General. - The Minister-in-charge of the MAS, who is the Chairman of the MAS, is accountable to Parliament and answers parliamentary questions relating to monetary and financial policies; MAS reports to the public via Monetary Policy Statements, Macroeconomic Review, press and private analysts’ briefings, and Annual Reports. - Standards for conduct of MAS officials/staff are laid out in the MAS’ Operations and Procedures Manual based on standards of the Singapore Civil Service; the Penal Code of Singapore and the Civil Service Corporate Statement released in 1995 disclose standards of incorruptibility, meritocracy and impartiality. ### Institutional structure and conflict-of-interest concerns - Current Chairman of the MAS is concurrently the Deputy Prime Minister and the Minister for Finance. - Multiple official responsibilities could give rise to potential conflicts of interest and complicate the accountability framework, particularly if fiscal and monetary policies came into conflict or if the Chairman were less senior. - The structure has not caused problems to date but could under different circumstances. - FSAP recommendation: move to a more conventional structure of separate responsibilities or devise other structures to recognize potential conflicts and implement transparent measures to minimize them. ### Principle-based assessment (select highlights) - Principle Section 1 (Clarity of roles, responsibilities, and objectives): - Roles and responsibilities are specified in the MAS Act (publicly available). - The legislative definition of the objective of monetary policy is broad and open to multiple interpretations; additional MAS publications narrow the definition. - Recommendation to clarify the ultimate objective in legislation to prevent market confusion. - Principle Section 2 (Open process for formulating and reporting monetary policy decisions): - Framework, instruments, and targets described publicly; semi-annual review process in place. - Progress in public disclosure noted, but nondisclosure of TWI weights, band limits, and intervention magnitudes weakens accountability. - Principle Section 3 (Public availability of information on monetary policy): - MAS provides chart of TWI for the past 12–18 months and has increased published material (e.g., January 2003 monograph “Monetary Policy Operations in Singapore”); however, aggregate FX intervention data not released on an ongoing/timely basis. - Principle Section 4 (Accountability and assurances of integrity): - Financial accounts externally audited by the Auditor-General. - Minister/Chairman accountable to Parliament; MAS reports regularly to public and markets. - FSAP recommends strengthening institutional safeguards and moving to separate responsibilities or alternative structures to address potential conflicts. ### Recommended Plan of Actions (Monetary Policy Transparency Code practices) - Principle Sections 1.1, 1.1.1, 1.1.5: - Update legislation to clarify the relative importance of growth, price stability, and exchange rate stability; consider requiring disclosure of performance against objectives and mechanisms for monitoring the MAS Board of Directors. - Principle Section 2.1: - Given the exchange rate system and intervention policy, full disclosure may not be appropriate; consider disclosing TWI weights as a step toward enhanced accountability. - Principle Section 2.4: - Increase ex post assessment of monetary policy performance in the context of recent outcomes to assist public judgment and boost accountability of Monetary Policy Statement and Macroeconomic Review. - Principle Section 4.1: - Move to a more conventional structure of separate responsibilities or an alternative structure recognizing potential conflicts and implementing transparent measures to minimize them. ### Authorities' response (summary) - MAS welcomes endorsement of high degree of policy transparency and intends periodic review of its approach. - MAS highlights recent strides in communication, including semi-annual Monetary Policy Statement, Macroeconomic Review, and daily broadcasting of amounts and types of instruments used in money market operations. - MAS view: disclosure of TWI weights is not critical given information on key parameters and historical TWI data; market participants can monitor TWI developments. - Disclosure of FX interventions should be limited to avoid compromising policy effectiveness. - MAS will publish a review of money market operations in each October issue of the Macroeconomic Review; MAS publishes monthly balance sheet and daily money market transactions. - MAS acknowledges ambiguity in legislation and current Chairman responsibilities; MAS is reviewing the MAS Act to address accountability issues. - Safeguards cited: - Monetary policy decisions are deliberated within the Monetary and Investment Policy Meeting where decisions are made by consensus. - High standards of professionalism and integrity in the public service and increasing transparency help minimize potential conflicts. ### Transparency of financial policy and supervision (overview and findings) - MAS is a consolidated supervisor empowered under the MAS Act to supervise all aspects of the financial sector, including payments and securities settlement systems, and to foster a sound and progressive financial services sector. - Mission includes: “to supervise the banking, insurance, securities and futures industries, and develop strategies in partnership with the private sector to promote Singapore as an international financial center.” - MAS has moved to a risk-based approach to regulation and oversight: - Risk-based capital requirements introduced for securities firms in 2002 and will come into effect for insurance companies in 2004. - Main findings: - Financial policy framework generally transparent; most aspects well specified in publicly available documents. - Changes to policy and supervisory frameworks are implemented only after formal consultative processes with market participants and the public. - Areas for greater public disclosure: application of regulatory requirements and operating procedures, and operating frameworks for oversight of payment and securities settlement systems. - More disclosure in regular publications about recent financial sector developments and MAS supervisory activities would strengthen accountability. - The multiple responsibilities of the MAS Chairman could complicate accountability for financial policy as well. ### Selected recommendations for financial policy transparency - Clarify oversight responsibilities for payment systems; passage of the new Payment System Oversight Act is welcomed to address this. - Publish a publicly available description of the approach to ongoing oversight of securities settlement systems, including consistency for systems operated by MAS and those operated by outside parties. - Address vagueness in the MAS Act regarding specification of objectives, requirement for disclosure of performance against objectives, and mechanisms for monitoring performance of the MAS Board of Directors. - Improve transparency of implementation and operating frameworks, especially for securities settlement systems; continue formal consultation processes for substantive regulatory changes. *Source: IMF Financial Sector Assessment/FSAP material contained in the supplied content unit.* ### 206. While a great deal of information on the financial sector is made publicly available, ### _cr04104 - 206. While a great deal of information on the financial sector is made publicly available, ### Public availability of information on financial policies - Observation: A great deal of information on the financial sector is made publicly available, but some improvements could be made to help the public assess how overall policy objectives are being pursued. - Specific gaps: - Information about the state of the banking sector and statutory compliance would help public assessment. - Publicly available information on banking supervision is not always at a level that sufficiently informs readers to judge MAS' performance. - Regulatory practice under the risk-based supervisory framework, where MAS applies requirements with some discretion, is not fully transparent. - FSAP recommendation: - Steps be taken to provide more certainty about the degree of consistency of the application of regulations or individual treatment. - Additional point: - Treaties with foreign financial agencies regarding information sharing and consultation in insurance and securities supervision are publicized, but more information about the scope of such treaties would be helpful to assess information gaps. ### Accountability and assurances of integrity by financial agencies - Current practices: - MAS announces major changes in financial policies through policy statements and/or speeches by senior MAS management, available on the MAS website and released to the media. - MAS responds to requests from the public and media to clarify policies or proposed legislative changes. - MAS Annual Report contains information and data on the growth and performance of the financial sector. - MAS' financial statements are released in the MAS Annual Report and are subject to external audit by the Auditor-General. - The Minister-in-charge of the MAS, who is also the Chairman of the MAS, is accountable to Parliament for MAS functions and answers parliamentary questions; MAS reports to the public through Monetary Policy Statements, the Macroeconomic Review press, private analysts' press briefings, and Annual Report press briefings. - Concerns and recommendations: - The Chairman’s multiple official responsibilities could give rise to conflicts of interest affecting MAS' accountability. - FSAP recommendation: move to a more conventional structure of separate responsibilities, or adopt another structure that recognizes potential conflicts of interest and implements transparent measures to minimize them. - Integrity framework: - Standards for MAS officials/staff are in the MAS’ Operations and Procedures Manual, based on Singapore Civil Service standards. - Standards of incorruptibility, meritocracy, and impartiality are disclosed via provisions in the Penal Code of Singapore and the Civil Service Corporate Statement released in 1995. ### Recommended Plan of Actions to Improve Observance of IMF's MFP Transparency Code Practices—Financial Policies - Principle Sections 5.1, 5.1.2, 5.3 - Recommended Action: Amend the MAS Act to include specific details to increase accountability, such as specification of objectives, requirement for disclosure of performance against objectives, and how performance of the MAS’ board of directors might be monitored. - Clarify MAS' responsibilities vis-à-vis supervision of the payment system and the securities settlement systems. - Note: Passage of a new payment system oversight act is expected to remedy payment system issues; framework for oversight of securities settlement systems should be made public in a single document. - Principle Sections 6.1.1, 6.3 - Recommended Action: Publicly disclose aspects of detailed guidance to banking supervisors and operating procedures for insurance supervisors. - MAS Annual Report and other publications would benefit from deeper and more detailed discussion about developments to strengthen accountability. - Principle Sections 6.1.5 - Recommended Action: Make more information public regarding procedures for sharing information, particularly in insurance and securities market supervision, to enable public assessment of regulatory gaps. - Principle Section 8.1 - Recommended Action: See Principle Section 4.1 on transparency of monetary policy. ### Authorities' response - MAS notes the FSAP team's assessment that MAS has made steady progress toward improving transparency and has a high degree of compliance with the Transparency Code. - MAS states it has developed a strong culture of transparency and an open process for formulating and implementing financial policies; this, together with sound supervision, provides a high degree of certainty and information to market participants. - MAS agrees it could publish more analysis on the financial system’s health and more information on implementation of risk-based supervision where useful to enhance accountability. - MAS acknowledges the Chairman’s multiple responsibilities may not be ideal and will review the MAS Act to address this and other accountability issues; MAS affirms numerous safeguards against potential conflicts. - MAS reports it has commenced drafting the oversight framework document for securities settlement systems and expects publication by the first quarter of 2004. ### FATF 40+8 Assessment: Overview and methodology (AML/CFT) - Report prepared by a team of Fund staff and an external expert; portions attributable to Mr. Paul Ryan (Australian Transaction Reports and Analysis Center). - Assessment based on review of Singapore’s AML/CFT legislation and binding MAS Notices applicable to regulated institutions, and implementation of laws and regulations. - Discussions held with senior officials from multiple government departments and agencies and industry representatives. - Assessment completed on August 8, 2003. - Persons subject to AML preventive measures include: banks, merchant banks, finance companies, life insurers, financial advisers, capital markets services licensees, approved collective investment scheme trustees, money changers and remittance agents. ### Main findings: overall AML/CFT framework - Positive findings: - Singapore has a sound and comprehensive legal, institutional, policy and supervisory framework for AML/CFT. - Legal system is well regarded, with a low crime rate, intolerance for corruption, and an efficient judiciary. - Known incidence of drug trafficking, corruption, and other serious crimes is comparatively low; white-collar crime is the most common money laundering typology. - Systematic and effective steps taken to address FATF mutual evaluation recommendations of 1998–1999. - Corruption, Drug Trafficking and other Serious Crimes Act broadened ML criminalization, imposed duty to report suspicious transactions, and changed mens rea to a "reasonable ground to believe" standard. - Mutual Assistance in Criminal Matters Act (MACMA) enacted in 2000 to provide a framework for mutual assistance. - Legally-binding MAS Notices impose sector-specific requirements on customer due diligence, internal controls, audit, and training. - Legislative, regulatory, and institutional changes, plus supervisory oversight and training, significantly strengthened the framework. - Long-established culture of compliance; implementation measures are well monitored and generally effective. - Areas requiring attention: - Limitations in practice on providing certain kinds of mutual legal assistance (provision of bank records, restraint of proceeds, enforcement of confiscation orders). - Customer identification measures for wire transfers need to be in place by February 2005 (FATF Special Recommendation VII). - Palermo Convention has yet to be ratified; ratification should move forward quickly. - Sector-specific MAS Notices should be updated during 2004 to comply with revised FATF 40 Recommendations of June 2003. - Principles-based Notices could be improved by adding more detailed and direct provisions and explicit guidance to assist financial institutions in practical implementation. - Work on amendments to sector-specific Notices has already commenced. ### Criminal justice measures and international cooperation - Criminalization and sanctions: - Singapore criminalizes ML broadly consistent with international standards and imposes requisite criminal and other sanctions. - Singapore adopted the list approach to predicate crimes, recognized by FATF; predicate offenses include crimes in the Vienna Convention but not all under the Palermo Convention. - Singapore has signed Palermo and is working toward ratification; the mission views an all serious crimes approach as preferable. - ML offense extends to persons who have committed both laundering and predicate offense; intent may be inferred from objective factual circumstances. - Laws impose appropriate criminal sanctions; fines for legal entities should be reviewed to ensure monetary sanctions are sufficient. - Terrorist financing (FT): - Singapore is a party to the FT Convention and has criminalized FT on that basis. - FT offenses are not listed as predicate offenses to ML; technically SR II approach not adopted, but underlying obligations appear met via TSOFA provision making laundering of terrorist funds a crime. - Confiscation and asset measures: - Confiscation and provisional measures are comprehensive; generally conviction required except for terrorism financing. - Adequate powers to restrain and freeze assets; specific provisions for identification and tracing are needed. - Laws provide for protection of third-party rights; minor changes recommended. - Measures to freeze funds of terrorists and financiers are comprehensive; no legal impediments to asset sharing though treaty may be needed; a formal mechanism for sharing confiscated property should be considered. - Consideration recommended for extending beyond FT a forfeiture scheme based on civil law. - Authorities maintain statistics on property frozen, seized and confiscated and provide training relating to confiscation and seizure. - Financial Intelligence Unit (STRO) and suspicious reports: - Suspicious Transactions Reporting Office (STRO) became operational in January 2000 and became an Egmont member in June 2002. - STRO has wide powers to collect, analyze and disseminate information and all functions appropriate to an FIU. - MAS has issued guidelines for identifying suspicious transactions; STRO provides regular guidance (typologies and interactive assistance). - Reporting procedures mandated in MAS Notices. - STRO can gather additional documentation and access public and nonpublic databases. - Administrative sanctions, including license revocation, are available for non-compliance via MAS. - STRO may share information with foreign authorities if an MoU or other agreement is in place; mission encourages concluding further MoUs to supplement two already in place. - Extensive statistics are kept on suspicious transaction reports received, analyzed and distributed. - Law enforcement and prosecution: - Clear designations of responsibility with dedicated offices and personnel; police unit works on proceeds of crime issues. - Investigative tools available though legal footing for some (e.g., controlled delivery) not tested. - Law enforcement has access to financial records via general police powers under the Criminal Procedure Code and special provisions under the Corruption, Drug Trafficking and other Serious Crimes Act and TSOFA. - Responsibility for investigation and prosecution rests with the Financial Investigation Division of the Commercial Affairs Department of the Singapore Police Force and the Attorney General’s Chambers; good cooperation among agencies. - Singapore’s size and penalty sanctions provide clear deterrence. - International cooperation and mutual assistance: - MACMA provides a framework for mutual legal assistance, but lack of treaties or relationships means certain assistance is unavailable to foreign authorities. - Non-coercive measures and taking of evidence are available; coercive assistance (provision of bank records, production orders, search and seizure, pre-trial restraints, proceeds identification and tracing, enforcement of foreign confiscation orders) may be provided only to “prescribed” countries, currently limited to the U.S. for drug trafficking matters. - Singapore signed a mutual legal assistance treaty with Hong Kong in June 2003, to come into operation once Parties ratify it. - Recommendation: widen possibilities for providing mutual legal assistance (e.g., make compulsory measures available absent a treaty, ratify Palermo Convention). - MACMA contains mandatory and discretionary bases for refusing assistance which may limit effectiveness; narrowing should be considered. - Because of FT Convention, fewer restrictions for FT mutual legal assistance even without an MLAT; Singapore should “designate” FT Convention parties to ensure timely responses. - Extradition for ML possible to/from Malaysia, Hong Kong and 39 declared Commonwealth countries and territories; recommendation to make extradition possible with a wider range of countries. - Recommendation: reconsider process where required notifications are planned only after a request is made to avoid possible ex post facto issues. ### Preventive measures (financial institutions and CDD) - Customer due diligence and accounts: - Anonymous accounts are prohibited. - Basic principles of customer due diligence (CDD) are set out as requirements in MAS Notices. - Notices will be updated shortly, an opportunity to make CDD more explicit and provide clearer guidance. - Full originator information for wire transfers will be required within the FATF Special Recommendation VII timeframe (deadline specified elsewhere as February 2005). - Record retention and internal policies: - Record retention requirements exceed the five-year requirement. - Internal policies to prevent ML are required but should extend to screening for employees and clarify intervals for internal training. - Suspicious transaction reporting: - Suspicious transaction reports are required to be made promptly; financial institutions need reminding regarding reporting "without delay." - Tipping off is prohibited and should be extended to TSOFA reporting. - Supervisory cooperation and sanctions: - Laws are comprehensive regarding integrity standards, provide for administrative sanctions and permit supervisor-to-supervisor cooperation. *Source: _cr04104 - 206. While a great deal of information on the financial sector is made publicly available,* ### 237. The MAS reviews financial institutions’ compliance with AML/CFT requirements ### The MAS reviews financial institutions’ compliance with AML/CFT requirements ### MAS inspection practices and supervisory approach - The MAS reviews financial institutions’ compliance with AML/CFT requirements mainly through on-site inspections and internal and external audit reports. - The MAS conducts full-scale inspections, in which coverage of AML/CFT measures is included. - A series of themed inspections focusing on financing of terrorism was conducted post-9/11, and also included AML policies and procedures. - The MAS is currently in transition to a risk-based supervision system. - The MAS recognizes AML/CFT as an element of supervision which should be taken into account for institutions which might otherwise be categorized as low-risk from a prudential perspective. - MAS inspection work includes: - sample testing of transactions and customer records, - visits to test compliance in retail branches. - Recommendation from assessors: - The MAS should review the frequency of its AML/CFT inspection work to ensure adequate coverage on an ongoing basis. - There would be merit in an annual on-site visit to cover AML/CFT policies and practices for each institution with vulnerable business. ### Industry compliance culture and identified weaknesses - Discussions with industry representatives indicated: - strong compliance culture with recognition of AML/CFT requirements, - generally appropriate procedures in place, - careful implementation. - The banking industry has its own guidance which goes beyond the MAS Notice and is taken into account in inspections. - The MAS expects supervised institutions to implement best practice; several financial institutions had implemented many provisions of the Basel CDD paper and the Wolfsberg principles for private banking. - The MAS has identified weaknesses in some institutions and required corrective measures. Examples of identified weaknesses: - documentation of AML/CFT policies and procedures was in some cases lacking or out of date, - some weaknesses were identified in account opening procedures. ### Assessors’ findings on variation in implementation and Notices - Assessors found marked variation in financial institutions’ detailed implementation practices, particularly in certain CDD issues such as: - politically exposed persons, - accounts operated by intermediaries, - account opening (including for internet banking). - The variation appears to stem from differing interpretations of the general principles of the MAS Notices. - While none of the instances would in themselves seriously undermine overall effectiveness, assessors recommended: - The Notices should be enhanced through more specific and detailed implementation guidance to provide greater clarity in the requirements. ### Summary assessment against the FATF 40+8 Recommendations and recommended action plan - Overall finding: - "Singapore complies well with most of the assessable FATF 40+ 8 Recommendations." - Main deficiency identified: - the provision of mutual legal assistance. - Other notable issues and recommended actions (verbatim terminology preserved): - No current requirement regarding originator information on funds transfers that meets Special Recommendation VII standards; Singapore plans compliance with Special Recommendation VII within the time-frame set forth by FATF. - Recommended Action Plan highlights (selected items as presented): - Provisional measures and confiscation (FATF 7): - Adopt specific provisions addressing the tracing and identification of proceeds. - For third party rights, have specific provisions addressing rights in pre-trial restraint period; for TSOFA ensure official notice of entry of forfeiture order so all affected persons have an opportunity to contest. - Customer identification and record-keeping rules (FATF 10-13): - Make more explicit the Notices regarding conduct of transactions with those failing to provide complete documentation of identity. - Make more explicit the duty to identify the persons authorized to operate accounts in the names of legal entities, and the requirements relating to the identification of beneficial owners. - Review the requirements for dealings by financial institutions with professional intermediaries acting on behalf of clients, to ensure that the practice is fully in compliance with the international standard. - Increased diligence of financial institutions (FATF 14-19): - Remind financial institutions of obligation to submit suspicious transaction reports without delay; undertake further awareness training of financial institutions for this. - Include in Notices requirement that financial institutions have adequate screening procedures to ensure high standards when hiring employees. - Extend the tipping off prohibition to reports under TSOFA. - Other forms of cooperation – Basis & means of cooperation in confiscation, mutual assistance, and extradition (FATF 33-35): - Take steps to broaden the availability of compulsory measures including, for example, bank records, restraint orders and enforcement of confiscation orders. - Consider narrowing the range of bases for refusal of assistance in MACMA that may limit the effectiveness of the Act in supporting international requests for mutual legal assistance. - Take the steps necessary to make extradition for ML possible with a wider range of countries. - Special recommendations on terrorist financing (selected): - V. International Cooperation: Issue notifications in the Gazette under the Extradition Act, applying the Act as if it were a treaty to countries that are a party to the FT Convention. - For mutual legal assistance, take steps necessary to ensure assistance will be available on an immediate basis. - VII. Wire transfers: Pending full implementation of Special Recommendation VII requirements, undertake further efforts to ensure financial institutions are fully aware of a specific obligation of enhanced due diligence on wire transfers, particularly with regard to incomplete originator information. - At least within the time frame set forth under Special Recommendation VII, impose requirement regarding the inclusion of complete originator information when transmitting funds. ### Other recommended actions (selected) - Criminalization: - Ratify the Palermo Convention on an expedited basis. - Reassess the list approach; at a minimum ensure all offenses with a maximum penalty of four years or more become predicate offenses to money laundering. - Confiscation/Seizure: - Continue with the review of current confiscation/forfeiture scheme in light of developments in other countries as well as local case law, including consideration of confiscation without conviction for additional general offenses. - Consider formal mechanism for the sharing of confiscated property. - Law enforcement: - Make available additional and specific funding to enable relevant authorities to investigate and prosecute terrorist and FT activity. - Customer Identification: - Amend notices to make more explicit the CDD obligations of financial institutions, and in particular those set forth specifically in the revised FATF 40 Recommendations. - Revise, as appropriate, mandatory and recommendatory elements of Notices to ensure clear guidance is provided, that recommendations do not undercut mandatory obligations and that FIs are provided a clear understanding of their obligations. - Suspicious Transaction Reporting: - Enhance the current provision that protects those who make reports relating to FT. - Internal Controls: - As CFT is incorporated more fully into laws and procedures, have Notices address internal controls, training and audit as they relate to FT. - Regarding Notice provision on the requirement for renewed training, afford “regular intervals” more specificity. Given pace of development of internal AML/CFT standards, an annual cycle for refresher training may be warranted. - Consideration could be given by financial institutions to requiring their employees and agents, as appropriate, to sign an annual certificate confirming receipt and understanding of training received and acknowledging their personal legal obligations in implementing AML/CFT measures. ### Authorities’ response and follow-up actions - The Singapore authorities: - welcome the positive assessment that Singapore’s laws, regulations and institutional arrangements provide a strong legal, institutional, policy and supervisory framework in terms of the FATF 40+8 Recommendations. - will implement many suggestions for further improvements as Singapore continues to strengthen its AML/CFT framework to comply with the revised FATF 40 Recommendations of June 2003. - On international cooperation: - authorities note assessment that Singapore has provided for mutual legal assistance through its legal framework, and that more treaty relations on such assistance should be established. - will continue to expedite current negotiations within the constraints of counterparties’ priorities. - On supervisory approach and Notices: - authorities believe the strong compliance culture and industry practices are evidence of effectiveness of principles-based Notices supplemented by inspections and follow-up. - will consider assessors’ recommendations on preventative measures, including more explicit rules on customer identification and record-keeping, in the context of risk and cost-benefit considerations. - On suspicious transaction reporting: - STRO is currently working on a computer system that allows online suspicious transaction reports submission and dissemination of AML/CFT educational material. - In time, all financial institutions and other professions would be encouraged to participate in this system. - On confiscation and seizure: - Singapore will continue to review and update the current overall scheme for confiscation and seizure in light of recent developments in other countries and local case law. - On Palermo Convention: - Singapore has signed the Convention and will consider ratifying it as soon as possible. - On Special Recommendation VII: - The MAS is currently in consultation with the financial institutions on cost-effective and efficient implementation of Special Recommendation VII. - Financial Institutions will be required to obtain full originator information within the timeframe set out in Special Recommendation VII. - As the Notices are amended, authorities will advise financial institutions that current AML measures of internal controls, training and audit are equally applicable to combating terrorism financing. - The Notices require financial institutions to provide refresher training at regular intervals to ensure staff are reminded of their responsibilities and are kept informed of new developments. ### Supplementary information: 2003 financial results of three local banks (summary) - The 2003 results of Singapore’s three local banks indicate further improvement in the final quarter of 2003 as the economic recovery gained momentum. - Despite the SARS outbreak, all local banks made profits and remained well capitalized by international standards in 2003. - Drivers of improved profitability in 2003: - significant increase in non-interest income, - continued operating cost containment, - substantial reduction of provisions associated with further improvements in loan quality. - Specific metrics (weighted averages of three local banking groups, unless otherwise noted): - The local banks’ weighted average capital adequacy ratio rose to about 18 percent as banks reduced their risk weighted assets and one bank raised a substantial amount of tier II capital. - In 2003, local banks continued to earn more than 30 percent of their before-tax profits from foreign operations, particularly in Hong Kong SAR and Malaysia. - Selected table figures (1998–2003; percentages and other values preserved exactly as in source): - Regulatory capital to risk-weighted assets: 18.1, 20.6, 19.6, 18.1, 16.9, 17.8, 17.9 - Regulatory tier I capital to risk-weighted assets: 16.0, 17.4, 16.4, 11.6, 11.3, 11.6, 11.8 - Shareholders’ equity to assets: 10.0, 11.0, 10.0, 10.0, 11.0, 11.0, 11.0 - Classified loans to total loans: 7.8, 8.5, 5.6, 5.7, 5.5, 5.3, 5.1 - Nonperforming loans (NPLs) to total loans: ... , 5.3, 3.4, 3.6, 3.4, 3.5, 3.2 - Classified loans net of specific provisions to regulatory capital: 28.7, 26.4, 23.5, 25.1, 25.0, 20.3, 18.8 - NPLs net of specific provisions to regulatory capital: ... , 11.3, 10.7, 11.4, 10.7, 9.7, 7.5 - Total provisions to classified loans: 51.1, 53.8, 53.8, 56.9, 60.2, 64.3, 66.6 - Total provisions to NPLs: ... , 86.2, 87.2, 90.1, 96.7, 96.6, 107.8 - Specific provisions to classified loans: 28.8, 34.2, 29.5, 32.6, 33.8, 35.7, 36.6 - Specific provisions to NPLs: ... , 54.7, 47.9, 51.5, 54.3, 53.6, 59.3 - Loan concentrations (in percent of total loans) — Bank loans: 28.1, 31.2, 35.4, 30.0, 29.3, 25.7, 24.3 - Loan concentrations (in percent of total loans) — Non-bank loans: 71.9, 68.8, 64.6, 70.0, 70.7, 74.3, 75.7 - Of which — Manufacturing loans: 9.2, 8.8, 9.1, 8.2, 8.4, 8.9, 8.6 - Of which — Building and construction loans: 17.2, 16.6, 16.3, 15.5, 14.1, 13.0, 12.3 - Of which — Housing loans: 18.2, 21.3, 22.3, 26.0, 27.5, 28.3, 28.9 - Of which — Loans to professionals and private individuals: 12.6, 13.1, 13.8, 13.5, 14.1, 14.0, 13.9 - Of which — Loans to nonbank financial institutions: 15.4, 14.0, 14.7, 13.1, 13.4, 13.5, 13.7 - After-tax profit growth: -37.7, 183.6, 22.2, -32.1, 1.4, ... , 15.8 - After-tax return on assets: 0.4, 1.2, 1.3, 0.8, 0.8, 0.8, 0.9 - After-tax return on equity: 4.2, 10.7, 12.6, 7.7, 7.6, 7.8, 8.3 - Net interest margin: 2.3, 2.2, 2.2, 2.0, 2.1, 2.0, 2.0 - Non-interest income to total income: 26.8, 31.8, 29.3, 36.4, 32.4, 37.9, 38.4 - Non-interest expenses to total income: 33.5, 33.3, 39.6, 43.6, 40.3, 39.5, 39.7 - Total before-tax profits (in millions of Singapore dollars): ... , ... , 3,624, 3,207, 3,506, ... , 3,874 - Total before-tax profits from foreign operations: ... , ... , -8, 765, 1,142, ... , 1,203 - Of which Hong Kong SAR: ... , ... , 196, 525, 641, ... , 631 - Of which Malaysia: ... , ... , 252, 200, 330, ... , 411 - Total before-tax profits from foreign operations/ total before-tax profits: ... , ... , -0.2, 23.9, 32.6, ... , 31.1 - Sources for the table: Monetary Authority of Singapore; and banks’ accounts. - Notes accompanying the table: - 1/ Represents weighted average of three local banking groups and includes operations of foreign branches and subsidiaries. - 2/ Classified loans include current loans that exhibit definable weaknesses that may jeopardize repayment, in addition to NPLs that are overdue more than 90 days (comprising loss loans—including fully provisioned loss loans not written off—as well as substandard and doubtful loans). - 3/ For the first three quarters of 2003, the figure is estimated based on annualized profits and assets at end-September 2003. *International Monetary Fund — SINGAPORE Financial System Stability Assessment Supplementary Information (March 10, 2004).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04104.pdf_