Financial System Stability Assessment

This paper discusses key findings of the Financial System Stability Assessment on Singapore. The Singapore financial system is highly developed, and well regulated and supervised. Singapore’s current regulation and supervision are among the best globally. The Monetary Authority of Singapore (MAS) oversees the entire financial system, and has the analytical and operational capabilities to do so effectively. Singapore is exposed to a broad array of domestic and global risks, especially in light of its interconnectedness with other financial centers. Stress tests suggest that these risks are manageable. This reflects the decisive macroprudential actions taken by MAS to address the threat of a bubble in the housing sector.


This paper discusses key findings of the Financial System Stability Assessment on Singapore. The Singapore financial system is highly developed, and well regulated and supervised. Singapore’s current regulation and supervision are among the best globally. The Monetary Authority of Singapore (MAS) oversees the entire financial system, and has the analytical and operational capabilities to do so effectively. Singapore is exposed to a broad array of domestic and global risks, especially in light of its interconnectedness with other financial centers. Stress tests suggest that these risks are manageable. This reflects the decisive macroprudential actions taken by MAS to address the threat of a bubble in the housing sector.

Table 1.

Singapore: Key Recommendations1

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Financial System Structure and Risks

1. Singapore is one of the largest financial centers in the world. Apart from its large and diversified domestic banks, it hosts major international banks attracted by Singapore’s efficient market infrastructure and its well established reputation for the rule of law and effective supervision. As of 2012, Singapore was the third largest foreign exchange (FX) market in the world (offering deep and liquid markets for trading and hedging of G3 currencies, as well as emerging market currencies) and one of the largest trading centers for OTC derivatives in Asia, with interest and FX derivatives dominating activity. Equity and fixed income markets are at an earlier stage of development. Singapore has a well-developed payment, clearing, and settlement infrastructure, with several systemically important financial market infrastructures (FMIs) (Figure 1).

Figure 1.
Figure 1.

Singapore: Systemically Important FMIs

Citation: IMF Staff Country Reports 2013, 325; 10.5089/9781475513431.002.A001

Source: IMF staff estimates.Notes:MAS operates the New MAS Electronic Payment System (MEPS+), which is the real time gross settlement (RTGS) system for interbank large value payments and the securities settlement system (SSS) for Singapore Government Securities. In addition, MAS is the central securities depository (CSD) for Singapore Government SecuritiesCorporate securities are settled in the Central Depository Pte Limited (CDP), which is the CSD and SSS for equities and corporate debt securities. The CDP also offers a CCP for all stocks, bonds, and other corporate securities traded on the Singapore Exchange (SGX). The CDP also operates DCSS, which is a securities settlement system for corporate bonds traded on the OTC market. The value of transactions in DCSS is low.A second CCP in Singapore is offered by the Singapore Exchange Derivatives Clearing Limited, SGX-DC (AsiaClear), which clears exchange traded and OTC derivatives. Both the CDP and the SGX-DC are wholly owned subsidiaries of the SGX.

2. Singapore’s financial center has several distinctive features (Figure 2 and Table 3):

  • Predominance of banks over other types of financial institutions. While it has undergone major structural changes in recent years, Singapore’s financial sector remains dominated by banks. As of June 2013, there were 122 commercial banks operating in Singapore, of which five were local banks, one was a foreign subsidiary, while the rest were foreign branches.

  • A small number of systemically important domestic banks. The three largest local banks2 have grown to about 30 percent of banking system assets (equivalent to about 180 percent of GDP). They are strong in traditional lending intermediation in Singapore and in the region (through subsidiaries). About 35 percent of banks’ exposures and income originate in the region, outside Singapore.

  • Foreign bank branches rather than subsidiaries. Foreign banks represent about 65 percent of total banking assets. European and U.S. foreign banks have the largest presence followed by a smaller presence of regional banks.3 While some foreign bank branches have a significant presence in domestic retail and corporate lending (the so-called full and qualifying full banks, QFBs), others limit their activities to the provision of services to their domestic clients, or IT operations in Singapore with a regional focus.4

  • Universal banking licenses. Local banks and branches are allowed to undertake universal banking, and can offer a wide range of financial services, provided these are regulated by MAS. They are exempted from holding additional licenses, but are required to notify MAS when they wish to commence regulated nonbank securities and financial advisory activities, and to comply with the relevant regulations.

Figure 2.
Figure 2.

Singapore: Financial Sector Structure

Citation: IMF Staff Country Reports 2013, 325; 10.5089/9781475513431.002.A001

Source: MAS
Table 2.

Singapore: Follow Up on the Recommendations of the 2004 FSAP1

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Singapore has addressed most of the recommendations made in 2004. MAS continues to review the implementation of recommendations made on the compliance with the Code on Transparency in Monetary Policy, and this is usually discussed with Fund staff in the context of Article IV missions. There is still scope for greater independence of MAS.

Table 3.

Singapore: Financial Sector Structure

(in billions of Singapore dollars)

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Source: MAS.

Other CMS licensees comprise companies conducting the following main regulated activity: REITs management, advising on corporate financing, leveraged forex trading, providing custodial services and securities financing.

Trust Companies Act was only effected in 2006. As such, 2005 columns are not applicable.

3. Other financial institutions include insurance companies, merchant banks, fund managers, market intermediaries, and financial advisors. The insurance sector is the second largest component of Singapore’s financial system. However, despite recent growth, its assets account for only about 6 percent of the total assets of the system (about 48 percent of GDP). The largest activity is life insurance, in particular policies issued to Singapore residents. There are also over 600 fund management firms5 with S$880 billion in assets under management (AUM),6 of which about 250 hedge funds managers with AUM of S$60 billion (about 250 percent and 17 percent of GDP, respectively). More than 80 percent of these assets come from sources outside Singapore, in particular from the region, attracted by its favorable tax and legal framework.7

4. Since the last FSAP, macroeconomic and financial performance has been strong.8 Real GDP growth and inflation averaged around 6 percent and 2½ percent respectively during 2004–11. The services sector has made the largest contribution to output and growth, accounting for about 60 percent of GDP and about 70 percent of growth. The financial system more than doubled in absolute terms, and now contributes around 12¼ percent to annual GDP (up from about 10 percent in 2004). Following a 9 percent decline in 2008 and early 2009, output recovered strongly and GDP is now significantly above the pre-crisis level. 2012 was a more difficult year for Singapore, however, owing to weak global demand and a tighter foreign worker policy, resulting in real growth of around percent, with weak activity continuing into early 2013. The resident unemployment rate remains at a near historic low of 3 percent.

5. Despite the strength of the economy in recent years, some risks to financial stability have emerged:

  • Real estate prices are already above their 2008 peak, before the last market correction. Low interest rates have been a key factor in the current property boom. Since 2009, the authorities have responded by taking several rounds of measures aimed at containing housing demand and boosting supply (discussed further below).

  • Credit growth has averaged about 12 percent for the past five years, with credit growth in the three largest banks of 14¾ percent year on year in June 2013. Banks have very low nonperforming loans (NPLs) (just over 1 percent) and lower net interest margins than historically, and have strong incentives to boost lending. About 40 percent of the three largest banks’ loans are related to real estate, including 25 percent in mortgage loans (predominantly based on floating rates), and 15 percent in construction loans.

  • The rapid expansion of domestic banks’ activities in the region has helped diversify their balance sheets but also gives rise to additional credit and liquidity risks. Credit growth has been and continues to be fast in banks’ foreign subsidiaries and through cross-border lending. European banks have scaled back their involvement in the region, which has created opportunities for Singapore banks to increase their market share. As of June 2013, the three largest banks’ loans to Greater China increased by 13½ percent year-on-year, while credit in U.S. dollars has increased by 20½ percent.9

  • Singapore banks are predominantly deposit funded and meet Basel III’s liquidity coverage ratio (LCR) when all currencies are aggregated. On a consolidated basis, their LTDs are below 90 percent, although LTDs in some currencies are above 100 percent and growing. Most notably, U.S. dollar deposits have not kept pace with the growth in U.S. dollar loans. Reflecting regular supervisory engagement by MAS, the local banks have taken steps to improve their funding profiles, such as issuing commercial paper and medium-term notes in U.S. dollars, diversifying sources, and stepping up U.S. dollar deposit-taking efforts.

6. Looking ahead, additional macro-financial stability risks include the following:

  • Given continued weak global demand and the restructuring of the Singapore economy to boost productivity, growth will likely be below the pre-crisis trend. Economic growth in Singapore is forecast at 3½ percent in 2013 and 2014 (Table 4).

  • A disorderly exit from Unconventional Monetary Policies (UMPs) in advanced economies and Emerging Market (EM) capital flow reversals may expose Singapore to volatility and strains from asset repricing and liquidity pressures given Singapore’s large financial sector and its cross-border activities. Domestic interest rates are also likely to increase and affect the ability of mortgage borrowers to service their debts.

  • There are also downside risks to economic growth in the region. These would adversely affect the banking sector, including through their subsidiaries abroad.

Table 4.

Singapore: Selected Economic Indicators

Main exports (percent of total domestic exports): Electronic products (21 percent); chemical products (18 percent)

GDP per capita (2012): US$52,052

Population (June 2012): 5.3 million

Unemployment rate (2012): 2.0 percent

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Sources: Data provided by the Singapore authorities; and Fund staff estimates and projections.

On a calendar year basis.

Overall balance excluding investment income, capital revenue, and interest payments.

The authorities recently migrated to the Balance of Payments Manual 6 (BPM6), which resulted in some balance of payments data revisions.

In months of following year’s imports of goods and services.

Increase is an appreciation.

7. These risks could be accentuated by the high degree of interconnectedness of Singapore’s financial system:

  • The predominance of foreign branches creates exposure to their parent banks (although sound parents would provide greater stability).

  • There is no clear separation between offshore and domestic financial transactions.

  • Cross-border interbank flows are large (Figure 3); and there is a growing negative net funding position of Singapore banks with respect to all major regions of the world.

Figure 3.
Figure 3.

Singapore: Interbank Assets and Liabilities

Citation: IMF Staff Country Reports 2013, 325; 10.5089/9781475513431.002.A001

Indeed, based on BIS locational data, the negative net funding gap appears to have increased significantly since the global financial crisis, with liabilities that are largely short-term. This intensive activity appears to reflect foreign banks’ use of Singapore as a center for liquidity management and the distribution of their products in the region. However, these claims could also point to the availability of cheap U.S. dollar funding.

8. Singapore has addressed most recommendations made by the 2004 FSAP (Table 2). These include: strengthening the macroprudential framework, completing the review of the regulatory minimum capital requirements for local banks, and enhancing the risk-based capital framework for insurers. There is still scope for greater independence of MAS.

Resilience to Risks

A. Banks—General

9. Financial soundness indicators for the big three domestic banks remained strong during the global and European crises. Singapore banks are among the highest rated in the world, with higher capital ratios and lower leverage than peer banks. Profitability is high and diversified. Asset quality is good and NPLs are low and well provisioned (Table 5 and Figure 4).

Table 5.

Singapore: Financial Soundness Indicators

(Local Banks’ Global Operations)

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Source: MAS

Figures include assets of Great Eastern Holdings.

Liquidity indicators are for Singapore’s banking system.

Figure 4.
Figure 4.

Singapore: Local Banks. Selected Financial Soundness Indicators

Citation: IMF Staff Country Reports 2013, 325; 10.5089/9781475513431.002.A001

Source: Company reports.

10. Stress tests suggest that banks are resilient to adverse macroeconomic scenarios. Their high capitalization could offset potential losses, including from large exposures to real estate. The scenarios described in Box 1 and Table 6 entail large declines in domestic and regional economic activity, falling asset prices, rising interest rates, and rapidly rising unemployment. Both the bottom up (BU) and top down (TD) stress tests conducted by MAS suggest that capitalization ratios would still remain above the domestic minimum regulatory capital ratio of 10 percent. Trading losses would be limited owing to the absence of significant proprietary trading and the fact that trading books mostly comprise domestic sovereign bonds.10 Credit losses, distributed between corporate loans and residential mortgages, would erode the capital base, while increased probabilities of default (PDs) would be reflected in an increase of risk-weighted assets, magnified by the initial low PD levels. All these factors would drive capitalization ratios down by almost one third. IMF TD solvency stress tests broadly confirm the results obtained by MAS, with balance sheet stress tests highlighting the resilience of domestic banks even if residential loan defaults were to reach the levels observed in the United States in the aftermath of the 2007-09 subprime crisis.

Table 6.

Singapore: Treatment of Sovereign Risk in Stress Tests

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Source: staff estimates.

11. Despite banks’ overall resilience to credit risk, country concentrations require close monitoring. From a systemic perspective, exposures outside Singapore are heavily concentrated in the region. MAS is fully cognizant of the growing regional linkages, follows these exposures closely, and considers that they are within safe limits. Even so, regional exposures need to be monitored closely in view of the possibility of a sharp or prolonged regional slowdown. Furthermore, given the low level of NPLs, small increases in NPLs could quickly erode provision coverage.

12. More generally, MAS should give more attention to onsite inspections of banks’ credit risks. The philosophy of MAS is to place significant emphasis on holding bank management accountable for the quality of underwriting and credit quality. While bank management, bank risk management systems, and prudent internal risk cultures are the first line of defense against weak loan and asset portfolios, strong onsite inspections are a necessary complement.

13. Liquidity shortages in foreign currency could affect some banks. When consolidated across all currencies, the LCRs of most banks and foreign branches, calculated using the parameters recommended in Basel III, exceed 100 percent, but the coverage for U.S. dollar exposures is lower. Stress tests suggest that if banks’ ratings were downgraded by several notches, some banks would find it difficult to continue to close their U.S. dollar funding gaps using the FX swap market. Over a one-year horizon, banks could require as much as U.S. $50 billion (about one fifth of foreign reserves). Given the possibility that liquidity conditions could tighten globally once U.S. dollar interest rates begin to increase, this illustrates the potential for pressure on Singapore’s foreign exchange position.

B. Banks—Interconnectedness

14. Foreign banks in Singapore mainly operate as branches, which by definition are closely interconnected with their much larger parent institutions. While branching facilitates an efficient allocation of capital and liquidity within the overall bank, and may contribute to stability when the parent is sound, instability in the parent may give rise to risks for the country hosting the branch. Branches pose special challenges for supervision and resolution. MAS is aware of these risks and has taken measures to mitigate them (Box 2). MAS has also advocated in international groupings for greater sharing of supervisory information, including on the G-SIFIs active in Singapore.

15. The FSAP examined whether branches pose material threats to financial stability.11 It assessed the ability of branches to maintain sufficient assets vis-à-vis local liabilities through the Asset Maintenance Ratios (AMRs) imposed by MAS. It also assessed potential spillovers from direct and indirect exposures in the domestic and cross-border interbank markets.

16. Stress tests results indicate that under the adverse scenarios described in Box 1, the AMRs would remain above the regulatory minimum. This result reflects the high quality of eligible assets, which are unlikely to deteriorate significantly under macroeconomic stress. AMRs thus appear to provide considerable protection against the risk of runs motivated by uncertain recovery of local claims. However, AMRs do not cover all liabilities, notably interbank claims; and this is consistent with the priority MAS gives to protecting non-bank depositors. While AMRs are an important element in limiting the risks arising from branch operations, MAS fully understands the need to complement them with a strict licensing policy, monitoring of risk in parent banks, and international supervisory cooperation.

17. Currency mismatches expose branches to liquidity risk. The LCRs in U.S. dollars and other foreign currencies (such as the Malaysian ringgit and the Hong Kong dollar) for some banks are below 100 percent, suggesting branches may be funding domestic assets from foreign sources.

18. Spillover risks were assessed using complementary approaches: cross-border and domestic network modeling, and a market-based approach to spillovers based on consolidated bank group information.

  • The network approach analyzed cross-border interbank assets and liabilities. Since it lacked information on bank-by-bank exposures, it simulated the potential domino effects and losses suffered by the Singapore banking system in the event of default of other banking systems with exposures to the Singapore banking system. This analysis used bilateral BIS Locational Banking Statistics for 2012Q3. One benefit of the locational approach is that it focuses on unconsolidated cross border interbank flows (Figure 3), allowing it to assess triggers and consequences of potential market freezes, and country concentration risk. Two scenarios were considered: (i) a credit shock scenario, defined as a national banking system’s default on interbank exposures to other national banking systems; and (ii) a combined credit and funding shock scenario, in which the troubled national banking system is unable to renew a portion of its funding to other national banking systems.

  • The authorities also conducted a network analysis of the domestic interbank borrowing/lending and derivatives market, based on actual bilateral claims. It included the top three domestic banks and seven foreign banks, which together account for about 75 percent of the domestic interbank borrowing/lending and derivatives exposures.

  • The market-price based spillover analysis assessed the effects on domestic banks stemming from foreign parent banks under stress. It also explored which foreign financial systems/banks are more vulnerable to financial stress in Singapore. It used equity prices (returns) of the top three domestic banks and 36 foreign banks to gauge the direction of linkages during extreme negative movements in banks’ equity prices.

19. The network analysis suggests that Singapore is more vulnerable to cross-border interbank exposures than to domestic interbank exposures.

  • This is particularly the case for credit shocks originating in the U.K., although Japan, South Korea, and the U.S. are also significant triggers. When a funding shock is added, the results show that Germany and the U.S. would also have very large effects on Singapore (Figure 5), possibly reflecting the strong funding linkages with those countries. This vulnerability appears to arise indirectly through domino effects and only after large financial centers are affected. However, the prevalence of short term liabilities implies that the domino effects could progress very quickly.

  • The authorities’ domestic contagion analysis shows that there are limited network effects from foreign to local banks in the domestic interbank market. The risks of contagion within the network of the three local banks are very low. Foreign banks are more vulnerable to credit and funding shocks from the local banks.

Figure 5.
Figure 5.

Singapore: Network Analysis. Effects of Credit and Funding Shock

(In percent of pre-shock capital)

Citation: IMF Staff Country Reports 2013, 325; 10.5089/9781475513431.002.A001

Sources: BIS Banking Statistics and IMF staff estimates.

20. The market-based spillover analysis shows that Singapore banks are sensitive to spillovers from other banks. On average, each Singapore bank receives spillovers from seven other banks from Singapore, from the region, and from around the world. The local banks are most vulnerable to spillovers from Swiss, U.K., and U.S. banks. Among other regional inward spillovers to Singapore, the Malayan and Thai banks are dominant.

C. Insurance

21. Insurance companies have proven to be highly resilient. For the insurance sector as a whole, regulatory capital buffers were sufficient to absorb not just losses from the global financial crisis, but also from natural disasters. Some indicators, such as net premiums and net investment income, suggest generally stable and robust profits in the life insurance business. The profitability of non-life insurers has been more volatile, as they have confronted several natural disasters in the recent past and in particular in 2011 (Figure 6).

Figure 6.
Figure 6.

Singapore: Insurance Companies. Selected Financial Soundness Indicators

Citation: IMF Staff Country Reports 2013, 325; 10.5089/9781475513431.002.A001

Source: MAS.

22. Potential vulnerabilities remain, and are being addressed by MAS. These arise from the presence of guaranteed returns, relatively high exposure to equities, and exposure to catastrophe risks arising from rapid growth in the offshore non-life sector.

  • In life insurance, participating policies with a guarantee represent the dominant product. However, the guaranteed rate remains low (2 percent), and insurers have the capacity to absorb significant losses by reducing dividends or bonuses. Stress tests conducted by MAS included a scenario that envisages a prolonged period of low interest rates. The results showed no significant adverse impact on life insurance companies based in Singapore.

  • The current asset allocation for some life insurance companies involves relatively high exposure to equities (about 20 percent of total non-linked assets for the industry as a whole). Stress tests performed at end-2012 (Box 3) indicated that a sharp reduction in equity prices lasting three years would oblige several companies to adopt remedial measures (such as reducing bonuses to policyholders and raising additional capital) in order to meet regulatory solvency requirements. MAS has implemented enterprise risk management (ERM) and requires investment policies to be approved by the Board. MAS is also reviewing risk-based capital requirements, to better capture the risk of volatility in equities.

  • Recent rapid growth in the offshore non-life sector may pose risks. The non-life sector has been exposed to catastrophe risks as a result of the offshore regional business written out of Singapore. For example, flooding in Thailand resulted in significant insured losses. In response, companies have reviewed their reinsurance arrangements, and the policy terms and conditions have been tightened. MAS is considering adding catastrophe risk charges to its solvency test formula by designing a standardized catastrophe scenario.

D. Capital Market Intermediaries and Transactions

23. Funds managed by asset managers, including hedge funds, have limited linkages with banks in Singapore and are unlikely to pose a systemic risk. Excluding insurance companies, nonbank deposits are relatively small at 1½ percent of local banks’ liabilities, and nonbank loans are only 0.6 percent of banks’ assets. Derivatives exposure with banks in terms of notional value is also low, at 0.3 percent of banks’ derivative transactions. Guarantees provided by banks and investments of banks in the nonbank financial sector are insignificant. Linkages with banks in Singapore are small inter alia because assets are mainly held in custody accounts with foreign banks outside Singapore. The Singapore asset management industry mainly serves as a conduit for funds that originate outside Singapore (more than 80 percent of the total), which are largely invested elsewhere (nearly 86 percent of the total). While investor funds mainly originate outside of the Asia Pacific region, they are invested primarily in the Asia Pacific region. The failure of a large asset manager is unlikely to pose systemic risk, but it could carry reputational risk for the Singapore financial sector.

24. The recent move by MAS to extend licensing or registration requirements to all locally-domiciled asset managers, including managers of hedge funds, is a welcome development. As of Q3 2012, MAS has required all locally-domiciled asset managers, including hedge funds managers, to either hold a capital markets license or be registered. Asset management firms operating under the repealed exempt fund management regime, of which there were 517 at end-2012, had to apply for registration or for a license. Although some hedge funds have expressed concerns about more intrusive regulation, it is unlikely to lead them to relocate to other global financial centers, since requirements are being tightened elsewhere as well.12

25. Most Singapore managed `hedge funds appear focused on relatively simple equity trading strategies with low leverage.13 There are about 250 hedge fund managers with more than S$60 billion in assets. Most, nearly 80 percent, of the strategies pursued by managers belong to the equity long-short approach, in which leverage is typically below two times NAV and exposures tend to be similar to long-only equity strategies. The remaining 20 percent is split equally between strategies that seek to exploit arbitrage opportunities, predominantly in the fixed income market; and those that take directional bets in a variety of asset markets. The latter, described variously as tactical or macro strategies, often employ significant leverage to boost returns, and often take concentrated bets in equity, fixed income, commodity, and currency markets. The volatility of historical returns of Singapore-managed macro hedge funds is similar to that of the S&P 500. The leverage of all hedge funds managed in Singapore, including off-balance sheet exposure, is below three times net asset value (NAV), with the exception of one fund that is levered nearly 17 times NAV. MAS is monitoring the hedge fund sector closely.

26. There is limited activity in the market for securities lending in Singapore, and collateral rehypothecation is not an issue at present. This market appears to be dominated by hedge funds and some local banks, while broker-dealers and traditional asset managers are largely absent. Although market participants will provide funding in exchange for a broad range of collateral, including cash, high-quality government securities and equities, hedge funds report using cash collateral because of significant haircuts on non-cash securities. Rehypothecation of collateral, though possible, is uncommon and there are clear rules for segregation of customer assets. While there is a requirement in place to limit rehypothecation to the size of customer assets, there appears to be no legal limit on the number of times collateral may be rehypothecated. There appear to be no systemic risks from these activities at present.

27. Real Estate Investment Trusts (REITs), Exchange-Traded Funds (ETFs), and structured finance vehicles do not appear to pose systemic risks. REITS, which have a market capitalization of approximately S$51 billion ($40 billion), are now subject to a number of safeguards in the wake of a funding crisis triggered by the collapse of Lehman.14 While real estate assets remain diversified across several regional markets as before, REITs have taken steps post-Lehman to better manage their loan maturity and leverage levels. Funding sources have also been diversified. Other investment products such as ETFs, structured finance vehicles, and money market funds, with combined assets under management of just over ¼ percent of the financial system, are presently too small to pose systemic risks. For speculative investment products available to retail investors, such as contracts-for-differences (CFDs) and levered FX (LFX), MAS has proposed new regulation to limit leverage, to protect and recover investor funds in case of dealer insolvency, and to enhance risk disclosure. While these products are available to retail investors, low trading volumes (below 5 percent of stocks) suggest that they pose no systemic risk.

E. Financial Market Infrastructures

28. Singapore has a well developed payment, clearing, and settlement infrastructure. Systemically important payment systems include the large value payment system MEPS+ and securities and derivatives clearing and settlement systems operated by the Singapore Exchange (SGX). Two financial CCPs are (i) the Central Depository (Pte) Limited (CDP) that clears equities and corporate debt securities; and (ii) the Singapore Exchange Derivatives Clearing Limited (SGX-DC) that clears exchange traded and OTC derivatives. CDP’s value of transactions processed was equivalent to 94 percent of GDP in 2012. Worldwide, SGX- DC is the eighth largest clearer in exchange traded equity index futures. Singapore is also one of the largest trading centers for OTC derivatives in Asia (just under S$9 trillion in the notional value of outstanding contracts). Its systemic importance is expected to increase with the implementation of the G20 reforms, notably the mandatory clearing of all standardized OTC derivatives.

29. CDP and SGX-DC are assessed as sound and efficient CCPs with effective risk management frameworks. Both CCPs comply with relevant international standards. They are subject to SGX’s comprehensive and transparent risk management framework comprising clear policies, sound governance arrangements and operational systems, and default and business continuity procedures that are regularly tested. The CCPs apply a comprehensive credit risk management framework and both maintain sufficient financial resources to cover the default of the clearing member and its affiliates with the largest exposure, as well as the default of the two financially weakest clearing members. However, SGX’s recovery plans should be enhanced in line with ongoing international policy developments to ensure the continuation of critical operations in extreme circumstances.

30. Global OTC derivatives reforms expose SGX-DC to legal risk owing to conflicts between domestic and foreign laws. MAS is encouraged to continue its efforts to mitigate these risks in close cooperation with foreign authorities. OTC derivatives reforms in the U.S. and the EU, enacted primarily through Title VII of the Dodd-Frank Act and the European Market Infrastructure Regulation (EMIR) respectively, have extra-territorial implications for SGX-DC as well as for market participants, and these will need to be addressed.

31. Competition with foreign CCPs may rise in the coming years, especially for clearing OTC derivatives. The mandatory clearing obligation will shift bilateral clearing among banks to CCPs, increasing potential clearing volumes. Competition may lead to reduced clearing-related fees and improved clearing services. However, as collateral is costly, CCPs may face market pressures to reduce collateral requirements as well. SGX and MAS are encouraged to continue compliance with international standards in this area and not compromise on CCP risk management. This does not preclude searching for efficiencies in the risk management framework.

32. For CDP, the possibility of separating the functions of CCP and central security depository (CSD) into two distinct legal entities under the existing holding company structure could be explored in line with international best practices. CDP provides two services with a distinct risk profile. As a CSD, CDP bears no risk as it does not permit any overdraft or debit balances in the securities accounts, whereas as a CCP it concentrates risk, becoming the counterparty to every novated trade. CDP’s own resources including capital are not clearly separated and earmarked between its CSD and CCP functionalities. In times of crisis, this could adversely impact the discharge of both roles. It is recommended that CDP review its legal structure to facilitate the potential application of its recovery and resolution framework.

33. The CCPs are encouraged to explore with members the possibility of widening their collateral pool. It could examine the feasibility of taking Singapore government securities as collateral to improve access to central bank liquidity in times of stress. A standing facility is provided by MAS, which allows the CCPs to repo Singapore government securities and collateral for overnight SGD funding. To enable the use of MAS’ standing facilities on an immediate basis (rather than converting its deposits into securities), they should make efforts to receive a part of the collateral in the form of Singapore government securities instead of cash.

34. Although risks related to the link with the Chicago Mercantile Exchange (CME) are assessed to be low, risk management procedures should be upgraded to be fully compliant with the Principles for Financial Markets Infrastructures (PFMI). The letter of credit (used for daily credit exposures of SGD-DC to CME) should be covered by collateral or replaced in full by highly liquid assets with low credit risk. The SGX-DC clearing fund cannot be used to cover potential losses related to this link, as this reduces the resources that the CCP holds to address the risks related to the potential default of clearing members.

Financial Oversight

35. MAS plays a central role in the development, management, and oversight of the financial system in Singapore. By law, MAS has the following objectives: maintaining price stability conducive to sustainable economic growth; fostering a sound and reputable financial center and promoting financial stability; ensuring the prudent and efficient management of Singapore’s official foreign reserves; and growing Singapore as an internationally competitive financial center. MAS conducts monetary and exchange rate policy, acts as the integrated supervisor of the financial sector (including systemically important FMIs and macroprudential policies), and is the resolution authority for financial institutions.

A. Systemic Liquidity Risks and Management

36. Monetary policy aims to achieve “price stability conducive to obtaining sustainable growth of the economy.” This objective is achieved by managing the exchange rate using a basket-band crawl (BBC) approach. MAS intervenes in the foreign exchange market when necessary, and domestic market operations are aimed at managing systemic liquidity.15 Banks are required to maintain minimum cash balances (Box 2) and minimum liquid assets (the latter will be replaced by the Basel III LCR requirement in January 2015). To inject and withdraw liquidity into and from the banking system, MAS uses four instruments.16 The liquidity management system is complemented by an intra-day liquidity facility and standing credit and deposit facilities.

37. Following the global financial crisis, the authorities have implemented a range of measures to enhance systemic liquidity management. MAS entered into a precautionary US$30 billion currency swap agreement with the U.S. Fed in 2008;17 signed the Chiang Mai Initiative Multilateralization Agreement; kept a higher level of Singapore dollar liquidity in the banking system; expanded the standing facility (SF) to include all MEPS+ participants;18 accepted AAA-rated S$ debt securities issued by supranationals, sovereigns, and sovereign guaranteed companies as collateral in the SF; and entered into cross-border collateral arrangements (CBCA) with other central banks to accept well rated foreign currencies and government debt securities as collateral in the SF, significantly increasing the pool of available collateral.19 However, as noted above, foreign currency liquidity, in particular U.S. dollars, is a potential vulnerability during periods of stress; and MAS will want to continue to work with banks to address this issue.

38. MAS is empowered to provide emergency liquidity assistance (ELA) to solvent financial institutions. Such lending would involve an expanded pool of collateral with appropriate haircuts, if it determines that such action is necessary to safeguard financial stability. However, any supply of ELA would be on a case-by-case basis. Given moral hazard concerns, the criteria and conditions for ELA are not published.

B. Macroprudential Oversight

39. MAS is the macroprudential authority in Singapore. The current Chairman of MAS is also the Deputy Prime Minister and Minister of Finance. The Chairman of MAS presides over the Board-level Chairman’s Meeting (CM), which is ultimately vested with responsibilities for both microprudential and macroprudential policies. At the level of the CM, the MAS holds meetings with the Ministry of Finance to discuss emerging macroeconomic and financial stability issues and to seek agreement on policies that can have broad fiscal ramifications. The CM, in its macroprudential policy role, is supported by the MAS Management Financial Stability Committee (MFSC), which is chaired by the Managing Director of MAS and includes other MAS senior managers. It is at the level of the MFSC that policies aimed at the stability of the overall financial sector, asset prices, and consumer prices are coordinated. It is also at this level that MAS collaborates with relevant external agencies in affected sectors—for example, the Urban Redevelopment Authority (URA), the Housing Development Board (HDB), and Ministry of Finance (MOF)—on housing related policies such as the imposition of stamp duties on house purchases or sales). The MFSC receives inputs from MAS staff in financial supervision departments, drawing both on bottom-up assessment of risks in individual financial institutions and on a top-down assessment of the system as a whole.

40. The macroprudential framework focuses on the financial system as a whole and on links with the real economy. While MAS actively manages the exchange rate to address inflation and growth, macroprudential policies target potential financial system vulnerabilities arising from capital flows, credit growth, and asset prices. Two key elements of the approach are (i) surveillance of systemic financial risk; and (ii) the design and calibration of policy instruments. In order to identify systemic risks, MAS analyzes developments in the global and domestic financial systems and traces their transmission channels and potential impact on macroeconomic and financial stability. In the design of policy instruments, MAS seeks to target the specific risk factor or transmission channel. Calibration of instruments is based on simulations of impact, and also on cross-country and past experience. Recent macroprudential measures have been focused on the housing market.

Macroprudential oversight of the housing market20

41. Singapore’s real estate market is dominated by public housing, which accounts for about 76 percent of the total housing stock. The government allocates land and provides loans to the HDB to build apartments, which are sold to qualified Singapore citizens at subsidized prices. These programs have helped increase the proportion of the population that owns real estate to about 90 percent. To further foster stability in public housing, the authorities have reduced debt service to income limits and restricted the use of Central Provident Fund (CPF) resources. These measures are expected to restrain price pressures in the resale market going forward.

42. Macroprudential measures for housing were tightened incrementally, and in a targeted fashion, also in view of uncertainty about their transmission. Instruments used included loan-to-value limits, loan tenure rules, stamp duties, property taxes, debt-service-to-income limits, minimum cash down payments, and supply measures.21 The measures have largely targeted the more speculative segments of the market, but since a significant share of private housing accounts is owned by foreigners and permanent residents, some measures have targeted this segment. Other measures more broadly seek to protect housing loan quality.22 Work is also underway to ensure that the credit bureau has a more complete picture of each borrower’s debt.23

43. There are also lending limits for banks, but these do not fully address concentration risks. A macroprudential limit on banks’ real estate exposure is set at 35 percent of total non-bank assets,24 but in practice has not been a binding constraint (the average current ratio is only 16 percent) since owner-occupied properties, which are typically of lower risk, are not included. Including owner-occupied housing loans would increase the average real estate exposures to 26 percent of total nonbank assets. Revising the approach to concentration in order to include owner-occupied properties, with greater discretion for MAS in its calibration, would help to limit concentration risk from real estate.

44. Macroprudential measures have been effective in addressing riskier lending practices and moderating price appreciation, but the adequacy of these measures will only be fully tested over time.

  • Data on new loans show declining loan-to-value ratios, and an increase in the share of borrowers with single mortgages.

  • Housing price inflation has also moderated recently, and housing affordability metrics remain contained.

  • However, loan growth to the housing sector remains elevated, and household debt has increased over the last three years, by about 7 percentage points of GDP, and reached 76 percent at end 2012.25

These outcomes, taken together, provide a rationale for the authorities’ cautious macroprudential approach.

45. Although households appear to have strong buffers, higher interest rates could cause stress. In aggregate, households have significant liquid assets, can draw on their CPF savings, and have substantial home equity: loan to value (LTV) ratios are below 80 percent for 90 percent of loans. Nevertheless, the lack of granular data on household balance sheets, including on the distribution of assets, makes it difficult to assess the extent to which some households are overextended. With nearly 70 percent of housing loans at variable rates, most of which reset every six months, the transmission from higher interest rates to higher debt servicing costs would likely occur swiftly. According to a MAS survey, if interest rates rose to 3.5 percent (about 200 basis points above current levels), the debt servicing costs of some 5–10 percent of households would rise above 60 percent of income. A July 2013 MAS press release appropriately warned of risks from over-levered households. Further outreach and education along these lines would be helpful.

46. Looking ahead, the authorities should stand ready to recalibrate macroprudential tools in line with changes in market conditions. To address further pressures in the housing market, the authorities should continue to adjust their macroprudential policies using a targeted approach. While the recent focus has been on curbing excessive house price appreciation, the authorities should remain vigilant against risks arising from exit from UMPs in the U.S. or other advanced economies and stand ready to adjust macroprudential policies in light of changes in the macroeconomic environment and housing market developments.

47. While macroprudential policies have mainly targeted housing, measures have also been taken in other fields. These include car loans, credit cards, and other unsecured consumer credit facilities. To address rising car loan tenures and rising price pressures on certificate of entitlement (COE) permits, MAS introduced a tenure limit (five years) and an LTV requirement on car loans, which were effective in reducing prices. In 2012, MAS also issued a consultation paper to engage financial institutions on the responsible use of credit cards and other unsecured credit facilities. The proposed set of revisions to the rules on unsecured credit complements the recent total debt servicing ratio (TDSR) measure, as it recommends that banks consider other liabilities of the borrower and restricts the extension of new credit to overextended borrowers. Enhancements to consumer data by the credit bureau would also improve the effectiveness of such measures.

C. Microprudential Oversight

48. MAS has very high supervisory standards and a tradition of conservative prudential guidelines. Its effectiveness stem from its role as the single supervisor for all financial intermediaries and financial markets infrastructures, coupled with a risk-based supervisory approach and supervisory intensity linked to the systemic importance of financial institutions.26 Overall compliance with all supervisory standards assessed by the FSAP mission was very high compared with other major financial centers.

49. One area that bears further consideration is the governance structure of MAS and its dual mandate, which may raise the potential for conflicts. At present, out of nine Board members, six are cabinet members (including the MAS Chairman who also serves as Minister of Finance and Deputy Prime Minister) or hold high government-related positions. Moreover, MAS has been assigned a dual mandate for prudential supervision and financial sector development. While no signs were found that the independence of MAS or its prudential supervision had been compromised by these arrangements, it would seem appropriate to revisit them to avoid the risk of possible conflicts in the future.


50. MAS capital requirements for banks are higher than those established by Basel III, and their adoption has been frontloaded (Table 11). The new requirements have been in effect since January 2013, and except for the capital conservation buffer, which follows the same phase-in schedule as Basel III, the minimum common equity capital ratio and the minimum Tier 1 capital requirements for 2013 in Singapore meet Basel requirements for January 2015.

Table 7.

Singapore—Risk Assessment Matrix 1/

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The RAM shows events that could materially alter the baseline path—the scenario most likely to materialize in the view of the staff. The relative likelihood of risks reflects staff’s subjective assessment at the time of discussions with the authorities of risks surrounding this baseline.

Table 8.

Singapore: Stress Testing Matrix for the Banking Sector

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Table 9.

Singapore: Solvency Stress Tests: Results and Main Drivers

(In percent unless indicated otherwise)

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Source: Staff calculations.

Calculated for four locally incorporated banks and three foreign branches.

Calculated for three foreign branches.

Calculated for three domestic banks, covering about 80 percent of domestic banking assets.

Calculated for three domestic banks, in percent of RWAs.