Singapore to remove distinction between international and domestic banking
In this article (5)
The Monetary Authority of Singapore (MAS) plans to change accounting rules that split domestic and offshore banking into separate ‘units’. 03 Jul 2015
Since 1968, banks have had to separate operations into domestic banking units (DBSs) and Asian current units (ACUs). Domestic operations, which are predominantly denominated in Singapore dollars, are accounted for through a bank’s DBU, while offshore operations, which are entirely denominated in foreign currency, are accounted for through the ACU.
However, global regulatory developments over the past five years have created a situation where the split system is no longer useful, Singapore’s minister of finance Tharman Shanmugaratnam said.
The initial aim of the divide was to safeguard domestic financial stability, Tharman said.
“For example, MAS imposed liquidity requirements on banks’ Singapore dollar liabilities – that is, only within the DBU. In addition, DBU activities were subject to large exposure and equity investment limits,” he said.
The divide also made it easier to offer incentives to encourage offshore banking activities out of Singapore, Tharman said, but focusing incentives in the ACU.
“The DBU- ACU divide served us well for decades, but has been losing its relevance,” Tharman said.
“The DBU- ACU divide served us well for decades, but has been losing its relevance,”
“Since 2004, our development incentives have no longer been based on the domestic versus offshore distinction, and the divide between domestic and offshore banking has in practice become increasingly porous,” he said.
In addition, global regulatory changes have meant that banks’ offshore activities are now subject to rules that are broadly similar to those governing DBUs in Singapore. These rules have increased the amount and quality of capital and the liquidity buffers that banks need, Tharman said.
“These global regulatory reforms have put all banks on a sounder footing. It has also reduced the relevance of MAS rules that distinguish between offshore and domestic banking activities of foreign banks, since home regulators will now be requiring their banks to meet enhanced standards on a group-wide basis,” he said.
Changes to MAS’s own regulations have also made the divide less relevant, Tharman said.
All banks in Singapore will have to meet liquidity requirements across the entirety of their operations by January 2016, while banks that are designated as ‘domestic systematically important banks’ will be subject to extra measures on both domestic and offshore business, he said.
In addition, Tharman said, “where a foreign bank branch has significant retail presence in Singapore, it will also be required to locally incorporate its retail operations. The subsidiary will be subject to the same suite of regulation as the local banks, and the same supervisory regime aimed at minimising risks to local depositors”.
MAS will therefore remove the divide from banking regulations, and details will be released in a consultation paper by August, Tharman said.
“There is no rush. We will implement the changes in close consultation with the banking community, and phase them in over time,” he said.
Questions & Answers
Q.What was the initial purpose of Singapore's split banking system?
What was the initial purpose of Singapore's split banking system?
The initial aim was to safeguard domestic financial stability. It allowed MAS to impose liquidity requirements and apply large exposure and equity investment limits specifically on domestic operations, while also offering incentives for offshore banking.
Q.Why is the distinction between domestic and offshore banking no longer considered useful by Singapore's authorities?
Why is the distinction between domestic and offshore banking no longer considered useful by Singapore's authorities?
Global regulatory developments, such as enhanced capital and liquidity requirements, have reduced the relevance of the split. Also, Singapore's own incentives changed in 2004, and the divide became increasingly porous in practice.
Q.What new requirements will all banks in Singapore face by January 2016?
What new requirements will all banks in Singapore face by January 2016?
By January 2016, all banks in Singapore will have to meet liquidity requirements across the entirety of their operations. Those designated as 'domestic systematically important banks' will face extra measures on both domestic and offshore business.
Q.What will happen to foreign bank branches with a significant retail presence in Singapore?
What will happen to foreign bank branches with a significant retail presence in Singapore?
Foreign bank branches with a significant retail presence will be required to locally incorporate their retail operations. The resulting subsidiary will then be subject to the same regulations and supervisory regime as local banks.
Reader pulse
Is MAS's regulatory consolidation a net positive for Singapore's financial sector?
22,957 votes so far