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    IMF Reports Assess Financial System Stability in Singapore

    July 15, 2019

    IMF published a report presenting results of the Financial System Stability Assessment (FSSA) of Singapore. Additional reports that were published include a staff report under the 2019 Article IV consultation as well as four technical notes and a report on the detailed assessment of observance (DAO) of CPSS-IOSCO principles for financial market infrastructures (FMIs) under the Financial Sector Assessment Program (FSAP). The technical notes cover implications of fintech for regulation and supervision of financial sector; financial stability analysis and stress testing; crisis management and resolution; and developments in macro-prudential policy. MAS published a statement welcoming the positive assessment of financial system in the country, highlighting that it will review the IMF recommendations within the reports and undertake appropriate measures to further strengthen financial oversight.

    The FSSA report highlights that main parts of the financial system appear resilient, even under adverse scenarios. The financial health of major banks in Singapore—particularly their sizable capital buffers and strong profitability—allows them to absorb the sharp increase in credit losses in severe but plausible scenarios of the solvency stress tests of FSAP. Similarly, insurance companies have strong capital positions, though stress tests point to vulnerabilities in parts of the sector. However, banks’ overall liquidity position is mixed—domestic currency liquidity is comfortable, but U.S. dollar liquidity is vulnerable to stress conditions. Banks prudently rely mostly on deposits for funding. Results of the FSAP cash-flow stress tests confirm the vulnerability in U.S. dollar liquidity. Given the importance of dollar funding and liquidity for banks and economy in Singapore, strengthening foreign exchange liquidity of banks should be a priority.

    Through the proactive use of macro-prudential policy, MAS has demonstrated its ability and willingness to act to suppress emerging threats to financial stability. More broadly, the strong framework for financial oversight has been enhanced further in recent years. The FSAP assesses the soundness and resilience of financial system in Singapore, with a focus on cross-border linkages and financial technology. The 2013 FSAP undertook a comprehensive and detailed assessment of the financial system and its oversight in Singapore and found the MAS supervision and regulation to be very strong. The 2019 FSAP follows up on the findings and recommendations of the 2013 FSAP and takes a deep look at risks related to the cross-border links of the financial system and the challenges posed by the current and prospective financial innovation. MAS and government of Singapore have implemented many reforms to address the recommendations of the 2013 FSAP.

    Some important reforms include the adoption of the new International Financial Reporting Standards, the implementation of Basel III capital and liquidity requirements and enhancements to the framework for crisis resolution and safety nets. Building on this progress in financial sector reform, the next steps should focus on enhancing the resolution framework, including by extending the new bail-in powers to senior unsecured creditors, strengthening the MAS’ Resolution Unit, and by developing guidelines and playbooks for the new resolution tools. It would be important to ensure more resources for the oversight of the New MAS Electronic Payments and Book Entry System (MEPS+). 

    MAS has managed to strike a good balance between promoting financial innovation and preserving financial stability, investor protection, and financial integrity; however, this is a challenge that will require continued vigilance, not least to minimize potential reputational risk. One area where the balance between supervision and the promotion of financial innovation could be improved is in the requirement of pre-notification of material outsourcing arrangements if MAS is not satisfied that a bank has managed its outsourcing risk adequately. Financial innovation has amplified the risk of cyber events and MAS is at the forefront in international efforts to reinforce cyber resilience.

     

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    Keywords: Asia Pacific, Singapore, Banking, Insurance, Securities, FSSA, Article IV, FSAP, Technical Notes, Basel III, Stress Testing,  Macro-Prudential Policy, Financial Stability, Resolution, Fintech, IMF

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