The Hunt for Financial Stability
Mr Speaker, the proposed amendments to the Financial Services and Markets Act seeks to confer to the Monetary Authority of Singapore two new powers: the ability to impose on financial institutions a minimum level of total loss-absorbing capacity (TLAC), and to allow the authority to contain proliferation financing for weapons of mass destruction. I will confine my remarks to the first of these objectives.
Are the TLAC requirements fit for purpose?
The amendment builds on a series of financial stability measures that the MAS has enacted in concert with the Basel III banking reforms, which emerged in the wake of the 2007/08 financial crisis. In Singapore, the final reforms—the so-called Basel Endgame—culminated with MAS Notice 637 late last year, and is expected to be fully phased in by 2029.
The latest TLAC requirements, however, appear to be distinct, focused on domestically systemically-important banks (D-SIBs). In particular, the standards were established by the Financial Stability Board for global SIFIs, and MAS’s TLAC requirements appear to build on this framework.
Sir, in pursuing these regulations, the goal is to ensure financial stability in our economy, while not imposing excessively onerous burdens on our banking system. I fully subscribe to these objectives. Even so, I have certain reservations about some of the parameters chosen for the TLACs, which I hope to have further clarity from the government.
First, I’ll note that MAS has chosen an external TLAC set at 14 percent of risk-weighted assets (RWAs). This is lower 4 percent lower than the 18 percent stipulated by the FSB, which MAS has justified by appealing to how our domestic systemically-important banks are “smaller in size and have different risk profiles.” But while this claim is somewhat true for our local large banks—DBS, OCBC, and UOB—this does not apply to the other D-SIBs with a presence here, including HSBC and Citigroup.
I understand that these foreign banks may already be subject to more stringent TLAC requirements, based on their home regulator, and especially if they are also designated as a material subgroup of their parent institution. Hence, they may well already be required to adhere to a higher percentage holding of risk-weighted assets than this 14 percent. Still, this does not fully absolve us from requiring a higher standard for our local D-SIBs. After all, DBS’s market capitalization is not that much smaller than that of Citi’s, and larger than that of other globally-significant financial institutions. And OCBC’s size is close to twice that of Standard Chartered’s. Given the range of financial market activities our local banks engage in, it seems hard to reconcile the notion that our banks are really smaller and less risky than their global counterparts.
Second, MAS spells out a list of criteria for what qualifies as a TLAC instrument—11, conditions, by my count. These include Tier 1 and Tier 2 capital. While this is not the place to question the appropriateness of what the industry has chosen to classify as high-quality capital, I wish to add a note of caution, based on two recent developments.
The first concerns how contingent convertible bonds (or CoCos) failed to serve as Additional Tier 1 Capital during the resolution process for investment bank Credit Suisse. Notably, the Swiss Financial Market Supervisory Authority announced, as part of the emergency package put together at the time, that CoCos would be written down to the tune of $17 billion. Setting aside whether this constituted a violation of the seniority of claims between debt and equity, the point is that an instrument that had hitherto been widely regarded as Tier 1 Capital failed to fulfill its function in a moment of crisis. It would be helpful to clarify MAS’s position on the matter, especially with regard to whether it could envision a situation where it, too, might choose to write down CoCos. And if so, does it still adjudge such instruments as legitimate constituents of a bank’s TLAC?
The second has to do with how the dollar and U.S. Treasuries—long regarded as the quintessential risk-free asset—is facing increasing questions about its credibility. The dollar, along with dollar-denominated assets, have long retained a privileged position in international finance and financial markets. Consequently, few questioned the safe-asset status of such instruments, and undoubtedly, such holdings would comprise a nontrivial share of our D-SIB’s TLAC capital. Yet the eroding status of the dollar as a safe asset—especially for global liquidity purposes—must surely prompt us to ask whether it is time for a reexamination of weight of dollar-denominated holdings in TLAC buffers.
My third question has to do with the current status of our local D-SIBs. Observers have suggested, previously, that our Big Three local banks have substantial capital buffers, and should have no issues with taking on board the fully-loaded set of Basel Endgame rules. Analysts have, similarly, pointed out how the current global interest rate environment is favorable for banks’ balance sheets and overall performance.
Keeping in mind the market sensitivity of revealing the full extent of each institution’s holdings of TLAC assets, it would nevertheless be useful to understand the MAS’s view of the overall balance sheet health. Will the government be able to share whether these institutions have, historically, been well-capitalized, and that this step is mainly a precautionary measure, to align with international macroprudential standards?
The financial trilemma
Let me take a step back, and speak to the more general problem that the Bill is attempting to solve. Ultimately, policymakers pursuing financial stability must recognize that they are able to do so alongside only either financial policies that are determined nationally, or continued financial integration with the rest of the world. This amounts to a trilemma: we can choose two of the three objectives, but one must give.
Ensuring financial stability is unobjectionable, especially given the size of the financial sector in our economy. Continued financial integration is also, by and large, expected, especially for an international financial center such as ours. So long as these two goals remain immutable, this leaves us with the need to constantly be willing to compromise on national financial policy, to best align with global standards.
This may mean adopting standards that may not always seem suitable for our national context, such as an 18 percent TLAC buffer, rather than the proposed 14 percent, or limiting the type of instruments that can be applied to the TLAC (as MAS appears to have concluded, in disallowing instruments held by retail investors). It could also mean being willing to expose our local Big 3 banks to greater winds of competition. We will undoubtedly face future choices of this nature, where we may be called to compromise our sovereign financial policies, in favor of our continued status as a global financial center.
So perhaps the relevant question we should be asking is: Is this sacrifice worthwhile? It could well be. But we must be clear-eyed, as policymakers, about the tradeoffs we are making in fulfilling our aspirations as a leading financial center, as today’s Bill amply illustrates.
Concluding thoughts
Some may claim that there is an essential tradeoff between the pursuit of financial stability through stringent regulation, versus sustaining a competitive financial system through regulatory laxity. This is a false dichotomy. More often than not, the unmitigated short-term pursuit of profit by banks can end up endangering their long-run solvency and viability, as well as that of the financial system as a whole. We should not yield to such red herrings, and instead, continue to hold our domestic banks to the standards required of an international financial center.
The stipulations provided for in these proposed amendments make headway in that regard, and for that reason, there is no reason to object to them. Notwithstanding my clarifications, therefore, I support the Bill.
