MAS consults on draft standards for operational risk capital and leverage ratio requirements for Singapore-incorporated banks and issues response to feedback received on proposed implementation of final Basel III reforms

28 January 2021

On 17 December 2020, the Monetary Authority of Singapore (“MAS”) issued the Consultation Paper on Draft Standards for Operational Risk Capital and Leverage Ratio Requirements for Singapore-incorporated Banks (“Consultation Paper”) and the Response to Feedback Received on Proposed Implementation of the Final Basel III Reforms in Singapore - Operational Risk Capital and Leverage Ratio Requirements (“Response”).

Consultation Paper

MAS sought feedback on its draft standards relating to operational risk capital and leverage ratio requirements for Singapore-incorporated banks. The consultation closed on 21 January 2020. As announced by MAS on 7 April 2020, MAS will implement the revised standards for operational risk capital and leverage ratio requirements from 1 January 2023.

The draft provisions in MAS Notice 637 on Risk Based Capital Adequacy Requirements for Banks Incorporated in Singapore (“MAS Notice 637”) take into account standards relating to operational risk capital and leverage ratio requirements in the final Basel III reforms published by the Basel Committee on Banking Supervision (BCBS), namely:

  • the consolidated Basel Framework, published in December 2019, which includes the following standards and frequently asked questions:
    •  “Basel III: Finalising post-crisis reforms”, containing revised standards for operational risk capital and leverage ratio requirements, published in December 2017
    • “Leverage ratio treatment of client cleared derivatives”, published in June 2019;
    • “Frequently asked questions on the Basel III standardised approach for operational risk”, published in August 2019; and
  • “Basel Framework frequently asked questions”, published in June 2020.

The draft provisions in MAS Notice 637, relating to operational risk capital and leverage ratio requirements, are annexed to the Consultation Paper. The Consultation Paper states that MAS will consult on the draft MAS Notice 637 provisions for other areas of the Basel III reforms at a later date.

Response

By way of background, MAS consulted on the proposed implementation of the final Basel III reforms in Singapore on 7 May 2019. The Response contains MAS’ response to the feedback received on the proposals on operational risk capital and leverage ratio requirements. The Response states that MAS will be publishing its responses to the feedback received on the other areas of the Basel III reforms at a later date.

MAS has considered the feedback received, and where appropriate, has incorporated them into the draft standards for operational risk capital and leverage ratio requirements for Singapore-incorporated banks issued for consultation.

Among other things, MAS considered feedback on its initial proposal not to implement the loss component in the calculation of the operational risk capital requirement for all banks. MAS recognised industry feedback that (1) setting the internal loss multiplier (“ILM”) to one for all banks would result in an operational risk framework that is not sufficiently risk sensitive, penalising banks that had low historical operational losses, and (2) incorporating losses into the calculation of the operational risk capital requirement would incentivise banks to manage their operational risks well.

As such, MAS will require banks with a business indicator (“BI”) greater than S$1.5 billion to incorporate losses into the calculation of the operational risk capital requirement and meet minimum loss data standards. Where a bank with a BI greater than S$1.5 billion has breached the requirement to meet minimum loss data standards, it will be required to set ILM equal to one, or if specified by MAS, greater than one. MAS will require all banks with a BI greater than S$1.5 billion to disclose their annual loss data under the Pillar 3 disclosure requirements.

Banks with a BI less than or equal to S$1.5 billion may choose to incorporate losses into the calculation of the operational risk capital requirement, subject to MAS’ approval and provided the bank meets the minimum loss data standards and discloses its annual loss data. Banks with a BI less than or equal to S$1.5 billion which do not choose to incorporate losses into the calculation of the operational risk capital requirement will be required to set ILM equal to one and will not be required to meet minimum loss data standards nor disclose their annual loss data.

Reference materials

The following materials are available on the MAS website www.mas.gov.sg: