IMF published its staff report and selected issues report on the 2017 Article IV consultation with Singapore. The authorities emphasized that the financial sector remains healthy and is backed by high capital, liquidity, provisioning, and profitability ratios and still-low non-performing loans (NPLs). MAS is vigilant to risks to the financial sector and committed to proactive surveillance and further improvements in supervision and the regulatory framework.
The staff report reveals that the banking sector performed well in 2016 amid a slight worsening of asset quality. However, NPLs continued to increase from low levels through 2017: in quarter 1 reaching about 2% of gross loans, up from about 1% in 2015. This is largely driven by the cash-flow problems in the oil and gas service sectors, with no signs of spillovers to other sectors. Liquidity risks are contained thanks to banks’ large liquidity buffers. The staff welcomes efforts to update the bank resolution regime. The regulatory proposal strengthening the MAS’ bank recovery and resolution framework (consistent with the Key Attributes of Effective Resolution Regimes for Financial Institutions) has been discussed with the sector and is expected to be taken up by Parliament later this year. Banks’ knowledge of the MAS’ crisis management toolkit and its application could be improved to make response to a possible crisis seamless. Additional (Basel III-consistent) regulatory improvements include the upcoming implementation of the net stable funding ratio (as of January 01, 2018) and ongoing phasing in of the countercyclical capital buffer (0.625% per year for 2016–2019).
Staff also welcomes the authorities’ ongoing efforts to strengthen the resilience of the financial sector, in addition to the MAS’ leadership on global financial sector regulation and cybersecurity. Singapore’s status as an important financial center and host to large global systemically important financial institutions (G-SIFIs) creates potential for spillovers from global or regional financial shocks. A resilient domestic banking sector and strong regulatory and supervisory frameworks are critical not only for domestic financial stability but also to limit spillovers to the rest of the region. Staff supports the authorities’ multi-pronged approach to develop a vibrant fintech ecosystem. Fintech venture capital activity, while still nascent, is picking up as Singapore positions itself as the industry leader. MAS is actively calibrating the regulatory space, including through guidelines for cloud computing, robo advisors, as well as providing safe spaces to experiment in the form of regulatory sandboxes.
The selected issues report assesses the performance of banking sector and examines the disruptive impact of digitization and automation on Singaporean economy. Capital and liquidity positions are sufficiently strong and well above the regulatory requirements. The results of the MAS’s annual industry-wide stress test confirmed that the banking system is able to withstand severe shocks. Under the prescribed scenarios, all banks stay solvent, with their capital adequacy ratios (CARs) remaining above Basel regulatory requirements, despite higher NPL and write-downs. Furthermore, capital and liquidity positions of the local banking groups remain strong. Liquidity coverage ratios of all three major banks remained high and rose in the fourth quarter of 2016, remaining well above the regulatory limits. Capital positions also remained strong, reflected in CARs well above the MAS’s regulatory requirement of 10%. Higher provisions associated with the increase in NPLs as well as compressed net interest margins weighed on banks’ profitability in 2016. While new NPL formation and further increases in provisions are expected to continue, recovering oil prices and freight rates should cap the pace of NPL formation.
Keywords: Asia Pacific, Singapore, Banking, Article IV, NPLs, Stress Testing, Resolution Framework, Basel III, Fintech, IMF
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