The new liquidity coverage ratio (LCR) requirements set forth by the Monetary Authority of Singapore are not expected to pose major challenges for the local Singapore banks, due to their sound funding and liquidity positions.
The new rules, announced on 24 June, are in line with wider Basel III objectives, and will require locally incorporated banks to maintain a full (100%) local-currency LCR from January 2015.
Fitch Ratings says that the strong domestic deposit franchises - Singapore dollar loan/deposit ratios are between 75%-85% for the three large local banks - suggest that they are well equipped to comply with the LCR requirements.
Nonetheless, Fitch expects deposit competition to heat up in Singapore as foreign banks compete more aggressively to attract local-currency deposits while local lenders continue to prioritise funding stability as balance sheets grow across the markets where they operate
An all-currency LCR will also be implemented, starting at 60% in 2015 and rising in annual 10pp steps to 100% by 2019.
Foreign banks that are deemed systemically important to the domestic banking system will also fall under the new framework, with LCR requirements of 100% and 50% for Singapore dollar and all-currency liabilities, respectively beginning January 2016.
The action by the MAS to ensure higher levels of liquidity coverage, especially for non-Singapore dollar-denominated liabilities, will help to curb potential sector imbalances.
The MAS also announced plans to reinforce its regulatory framework for foreign banks operating in Singapore.
New proposed rules will require the retail operations of foreign banks with at least a 3% market share of non-bank deposits and at least 150,000 depositors with account balances of up to SGD250,000, to be designated as domestic systemically important banks (D-SIBs).
This will likely capture a large majority of the domestic Singapore banking system. D-SIBS will be required to incorporate locally and maintain an additional 2pp of common equity Tier 1 capital above international minimums (in addition to the new LCR requirements), which is the same as that required for the three local banks.