The International Monetary Fund (IMF) conducted a Financial System Stability Assessment (FSSA) of Singapore and published its findings in 2004. The IMF concluded that Singapore has a sound prudential and regulatory framework for effective banking supervision that exhibits a high level of observance with the Basel Core Principles (BCPs). However, the IMF FSSA did point to a few irregularities. One issue is insufficient clarity regarding the role of the chairman of the Monetary Authority of Singapore (MAS), Singapore's central bank and unified financial sector regulator. Another has to do with the need for greater clarity and comprehensiveness of the definition of large exposure limits. The IMF's 2005 Article IV (published in 2006) report indicates that the Singaporean authorities have taken measures to delineate and document the MAS' chairman's multiple roles and responsibilities. The 2006 IMF report also notes that banks in Singapore remain profitable and well capitalized. However, there is little recent information publicly available addressing issues relating to Singapore's compliance with the BCPs.

General Overview

The International Monetary Fund (IMF) conducted a Financial System Stability Assessment (FSSA) of Singapore and published its findings in 2004. The report concluded that Singapore has a sound prudential and regulatory framework for effective banking supervision that exhibits a high level of observance with the Basel Core Principles (BCPs). According to the IMF's 2005 Article IV (published in 2006), the financial system in Singapore is "robust" (p. 3) and the banks are "healthy" (p. 7), with adequate capitalization and strong profits. The Singapore banks have been expanding abroad, broadening their product lines, and entering into new markets, like Islamic banking. These developments, per the IMF report, "underscore the importance of continued close surveillance" (p. 3). Banks also showed a decline in loan-loss provisioning due to falling non-performing loans, and a rise in non-interest earnings. In this respect, the IMF welcomes efforts by the Singapore central bank -- the Monetary Authority of Singapore (MAS) -- to improve cooperation with regional regulators, including through information sharing. Per the IMF's 2006 report, the deposit insurance scheme introduced in 2005 promises to further strengthen the banking sector.

One of the key 2004 FSSA recommendations included further enhancing MAS's legal and regulatory framework through the completion of the review of the regulatory minimum capital requirements for local banks, planned for introduction in late 2004. The report also recommended that the MAS complete the ongoing review of the Monetary Authority of Singapore Act. The 2006 IMF report finds that Singapore has implemented this recommendation by issuing MAS Notice 637, which sets out revised capital computation rules, including capital adequacy requirements, for reporting banks. Further, the FSSA recommended enhancing the MAS' accountability, independence, and oversight capabilities, especially by reducing the potential for conflicts of interest arising from the multiple official responsibilities of the chairman of the MAS. The 2006 report finds that, as of August 2004, the Minister of Finance is no longer the Chairman of the MAS. However, because the chairman is a senior minister, he still holds multiple responsibilities both in his ministry and in the MAS. The MAS explained to the IMF that it "has formalized the terms of reference for board level committees so as to delineate and document chairman's multiple roles and responsibilities, and prevent any ambiguity or potential conflicts of interest" (p. 29). As of 2006, the MAS was also working on amending the Monetary Authority of Singapore Act to specify the MAS's objectives and functions, as well as its accountability framework. The amendment was expected to take effect by the end of 2006. The 2006/2007 annual report of the MAS notes that the review of the Monetary Authority of Singapore Act has been completed and the amendments came into effect in two phases, the first in January 2004, and the second and last in February 2007. The amendments "seek to improve MAS' accountability and governance, streamline [MAS'] operations and revise the scope of MAS' powers" (p. 41).

The MAS website states that the Banking Supervision Department and the Complex Institutions Supervision Department (CISD) within the MAS are responsible for the licensing and supervision of banks, merchant banks, and finance companies. The CISD supervises the local financial conglomerates performing banking, insurance and securities activities. The two departments monitor the safety and soundness of banks and other supervised financial institutions and promote "the adoption of international best practices in corporate governance and risk management."

The 2004 IMF FSSA reported that there were no fundamental weaknesses threatening financial stability in Singapore. The MAS is empowered by the Monetary Authority of Singapore Act, the Banking Act, and the implementing regulations and rules including guidelines, notices and circulars, "to license and supervise commercial banks, to establish and enforce legal and prudential standards, to impose fees, to set budget and hire staff, and to share information between supervisors" (p. 44). In addition, the efficient legal system bestows many benefits to the financial sector; the accounting standards are closely aligned to international best practices; and the country is taking ongoing initiatives to foster good corporate governance and strengthen disclosure practices. Per the 2007 "International Narcotics Control Strategy Report" by the U.S. Department of State (DoS), as of September 2006, there are 109 commercial banks in Singapore, that include 5 local and 24 foreign-owned full banks, 45 offshore banks, and 35 wholesale banks. All offshore and wholesale banks are foreign-owned.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

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The 2004 IMF FSSA notes that the MAS is empowered by the Monetary Authority of Singapore Act, the Banking Act, and the implementing regulations and rules including guidelines, notices and circulars, "to license and supervise commercial banks, to establish and enforce legal and prudential standards, to impose fees, to set budget and hire staff, and to share information between supervisors" (p. 44). Although the 2004 IMF FSSA attests to the overall high observance of Singapore with the BCPs, it does not provide individual compliance levels for each principle. There is little further information publicly available addressing Singapore's compliance with this principle.

1.(2) Operational independence and adequate resources.

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According to the 2004 IMF FSSA, the Monetary Authority of Singapore Act requires that the MAS establish a Board of Directors, appointed by the President of Singapore on the recommendation of the Cabinet. The Board is responsible for policy making and general administration of the affairs of the organization. The directors hold office for three years, at the end of which they can be reappointed. The Managing Director of the MAS is also appointed by the President of Singapore, on the recommendation of the Public Service Commission. Legislation empowers and entrusts the Managing Director "to make decisions and exercise all powers and do all acts which may be exercised or done by the MAS, and to conduct the day-to-day administration of the MAS" (p. 44).

Further, per the 2004 IMF FSSA, the MAS is self-funded and the President of Singapore approves its budget . The IMF FSSA, however, noted that in 2004 the Chairman of the MAS was also the Minister of Finance and the Deputy Prime Minister. The FSSA commented that multiple official responsibilities could result in conflict of interest, and advised the MAS to move to a structure of assigning responsibilities that would preclude conflicts of interest and foster transparency. The MAS responded to this observation by stating that there existed adequate institutional safeguards against such conflicts of interest, and there have been no instances of compromise in supervision due to the multiple responsibilities of the Chairman. The 2006 report finds that as of August 2004, the Minister of Finance is no longer the Chairman of the MAS. However, as a senior minister, the chairman still holds multiple responsibilities both in his ministry and in the MAS. The MAS responded to the IMF's concerns by noting that it "has formalized the terms of reference for board level committees so as to delineate and document chairman's multiple roles and responsibilities, and prevent any ambiguity or potential conflicts of interest" (p. 29).

The 2004 FSSA also calls for clarity in the definition of "national interest", which guides the Minister's decisions on mergers, concentration and anti-competitiveness. To this recommendation, the MAS counters that national interest issues have been publicly defined and explained, and deviations from them can come under scrutiny from the stakeholders as well as the Parliament or the Parliamentary Committee on Finance. The Banking Act also holds the Minister to give credence to prudential considerations while approving applications to acquire significant shareholdings in a locally incorporated bank .

1.(3) A suitable legal framework for authorization and ongoing supervision.

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The 2004 IMF FSSA notes that the Monetary Authority of Singapore Act, the Banking Act, and the implementing regulations and rules including guidelines, notices and circulars, form the legal framework empowering the MAS "to license and supervise commercial banks, to establish and enforce legal and prudential standards, to impose fees, to set the budget and hire staff, and to share information between supervisors" (p. 44). Nonetheless, there is little information publicly available addressing Singapore's compliance with this principle.

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

II

The 2004 IMF FSSA notes that the legal system in Singapore operates efficiently and offers adequate protections to creditors in the event of bankruptcy . Further, under the provisions of the Banking Act, merger and substantial shareholdings applications are evaluated and approved on the basis of prudential standards including fit and proper, and safety and soundness criteria, as also on considerations of national interest, on issues such as concentration or anti-competition . The Banking Act also empowers the MAS to take action against a bank for carrying activities that are potentially detrimental to the interest of its depositors, creditors or the general public; or for its inability to meet its obligations. These include appointing an advisor to the negligent bank; directing another person to assume control of and carry out the business of that bank; changing or revoking the existing conditions of the license of the bank; or imposing conditions . Nonetheless, there is little information publicly available addressing Singapore's compliance with this principle.

1.(5) Legal protection for supervisors.

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There is insufficient information publicly available that directly addresses Singapore's compliance with this Principle.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

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The 2004 IMF FSSA notes that the MSA "maintains various information sharing arrangements" (p. 47) with host and home country supervisors of the banking sector. Further, the Banking Act permits the MAS to share supervisory information with foreign home supervisors, on the condition that confidentiality of the shared information is protected . Nonetheless, there is little information publicly available addressing Singapore's compliance with this principle.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

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The 2004 IMF FSSA notes that as the licensing authority of banks, the MAS requires them to submit information such as ownership structure, strategic and business plan, financial statements, experience of the board of directors and management, framework of risk management, and monitoring systems, and for a foreign bank, prior consent of the home supervisor . Despite the above information, there is little information publicly available addressing Singapore's actual compliance with this principle.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

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The 2004 IMF FSSA observes that "the criteria for issuing licenses are consistent with those applied in ongoing supervision" (p. 45). Further, the MAS evaluates the financial strength, the suitability of shareholders, directors and management, and home or host supervision regime before issuing licenses . Nonetheless, there is little information publicly available addressing Singapore's compliance with this principle.

4. Authority to review and reject transfer of ownership.

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The 2004 IMF FSSA notes that under the Banking Act, the MAS evaluates mergers and substantial shareholdings applications on the basis of prudential standards including fit and proper, and safety and soundness criteria. Its recommendations for approval or disapproval are communicated to the Minister, who then approves the applications . Similarly, per the Banking Act, MAS evaluation and Ministerial approval is required for "any person who wants to hold shareholdings in a bank incorporated in Singapore or in a financial holding company of 5 percent, 12 percent and 20 percent or more or become indirect controller" (p. 45). Apart from the above descriptive information, there is little information publicly available addressing Singapore's compliance with this principle.

5. Authority to review major acquisitions and investments.

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The 2004 IMF FSSA notes that under the Banking Act, the MAS evaluates mergers and substantial shareholdings applications on the basis of prudential standards including fit and proper, and safety and soundness criteria. Its recommendations for approval or disapproval are communicated to the Minister, who then approves the applications on the above recommendations as also on considerations of national interest on issues such as concentration or anti-competition . Further, MAS approval is required by banks to "acquire or hold any equity investment in a single company, the value of which exceeds in the aggregate 2 percent of the capital funds of the bank or such other percentage as the MAS may prescribe" (p. 45), and to "either acquire or hold a stake of more than 10 percent voting rights or share capital in any company" (p. 45). Apart from the above descriptive information, there is little information publicly available addressing Singapore's compliance with this principle.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

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The 2004 IMF FSSA had noted that the capital adequacy requirements in Singapore "broadly conform[ed] to the Basel Capital Accord for credit and market risks" (p. 45). Further, the minimum capital requirements in Singapore were stricter than the Basel Accord requirements, and the MAS could impose even higher capital requirements on supervisory considerations . The 2004 FSSA found that Singapore was reviewing the regulatory minimum capital requirements for local banks so as to set capital adequacy requirements on the basis of risk profiles and risk management capabilities of individual banks and recommended the country to complete the review . The 2006/2007 annual report of the MAS states that the MAS issued changes to the capital adequacy requirements for Singapore incorporated banks in February 2007, effective as of March 2007. According to these changes, Tier 1 capital adequacy ratio (CAR) has been lowered from 7 percent to 6 percent, the range of instruments qualifying as Tier 2 capital has been broadened, the total CAR requirement of 10 percent has been left unchanged, and circumstances when early redemption or repurchase of capital instruments are allowed have been clarified . Further, the MAS has been collaborating closely with Singapore-incorporated banks to prepare for the Basel II implementation in Singapore on January 1, 2008 . Despite the above descriptive information, there is scant information publicly available addressing Singapore's compliance with this principle.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

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The 2004 IMF FSSA notes that "overall, prudential regulations and requirements are sound" (p. 45). However, there is insufficient information publicly available that directly addresses Singapore's compliance with this Principle.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

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The 2004 IMF FSSA notes that "overall, prudential regulations and requirements are sound" (p. 45). The MAS imposes strict limits on consumer lending and the consumer credit bureau was established in 2002 to facilitate the risk management of consumer loans. Also, the MAS "uses conservative criteria for determining classified loans" (p. 19) and there is 100 percent provisioning for such loans in all local banks . However, there is insufficient information publicly available that directly addresses Singapore's compliance with this principle.

9. Prudential limits and management information system on concentration of exposure.

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There is insufficient information publicly available that directly addresses Singapore's compliance with this principle. The 2004 IMF FSSA noted that claims to be included in large exposures are not properly clarified in the laws and regulations, and therefore recommended that they be explicitly enumerated. The IMF in its 2004 FSSA also recommended that the definition of "closely related group" be made more comprehensive . In this respect, the MAS responded that it requires banks to "have systems and controls in place to aggregate and manage their exposures to a single group borrower, including the parent and subsidiary banks to have systems and controls in place to aggregate and manage their exposures to a single group borrower, including the parent and subsidiary companies" (IMF 2004, p. 48). The 2006/2007 annual report of the MAS adds that the Banking Act (amended subsequently in 2007) set prudential limits on concentration of exposure so that default by a single large borrower did not adversely affect the financial strength of the bank. Also, the MAS has refined these limits by making them comprehensive and more risk-based so as to bring them in line with international best practices .

10. Arm's length rule and monitoring for connected lending.

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Refer to Principle 7.

11. Policies and procedures for country risk and transfer risk.

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Refer to Principle 7.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

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There is insufficient information publicly available that directly addresses Singapore's compliance with this principle. However, the 2004 IMF FSSA did note that that the MAS conducts regular on-site inspections as well as offsite monitoring to evaluate and verify the credit, market, liquidity, and other material risks taken by commercial banks, wherein risk management processes, policies, procedures and practices are evaluated and verified .

13. Comprehensive risk management processes.

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The 2004 IMF FSSA noted that the MAS strengthens its risk-based regulation and oversight of financial institutions on an ongoing basis, and has already established it satisfactorily for bank supervision. The MAS evaluates and verifies the credit, market, liquidity and other material risks taken by commercial banks, wherein risk management processes, policies, procedures and practices are evaluated and verified . Nonetheless, there is insufficient information publicly available that directly addresses Singapore's compliance with this principle.

14. Adequate internal controls.

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There is insufficient information publicly available that directly addresses Singapore's compliance with this principle.

15. Strict "know-your-customer" rules and high ethical and professional standards.

CP

According to the 2004 IMF FSSA, "Singapore financial institutions have a strong compliance culture" (p. 84), recognizes the requirements for anti-money laundering and combating the financing of terrorism (AML/CFT) regimes, and maintains appropriate procedures and a careful implementation policy. The FSSA notes that the MAS has issued MAS Notices and Guidelines to financial institutions for identifying suspicious transactions and on reporting procedures; and on basic Customer Due Diligence (CDD) measures and prohibiting anonymous accounts. Singapore's Financial Intelligence Unit, the Suspicious Transactions Reporting (STR) Office also provides regular guidance in the form of typologies and other types of interactive assistance. The FSSA also found that AML/CFT inspections are part of regular on-site inspections and offsite monitoring through internal and external audit reports. The banking industry had guidelines that went beyond the MAS Notices, and the banks in Singapore were found to have implemented many of the proposals of the Basel CDD paper and the Wolfsberg principles for private banking. The FSSA did find marked variations in the implementation of AML/CFT requirements by institutions, and therefore recommended that guidelines be clarified and made more stringent, especially with regard to conducting transactions without complete identification, identifying persons authorized to transact in the name of legal entities; identification of beneficial ownership; CDD measures and increased due diligence; suspicious transaction reporting without delays; adequate screening procedures for hiring; and extending the tipping-off procedures to reports under the Terrorism (Suppression of Financing) Act . Singapore authorities responded that they are working towards revising the MAS Notices and the STR Office was in the process of introducing a computerized system for facilitating STRs by financial institutions and dissemination information and guidance to the institutions for AML/CFT compliance .

The 2006/2007 MAS annual report states that the MAS issued revised AML/CFT Notices for the different financial sectors in March and April 2007. These introduced more rigorous CDD requirements; employed risk sensitivity to the CDD measures with enhanced due diligence for higher risk customers like politically exposed persons, and simplified due diligence for low risk customers; and imposed legally binding obligations on financial institutions. These notices were revised to keep them aligned to the revised Financial Action Task Force (FATF) Recommendations. The MAS also conducts ongoing AML/CFT inspections as part of its regular inspections of financial institutions to ascertain that their AML/CFT policies, procedures and controls are in place and they are in compliance with the MAS' regulations .

16. Effective supervisory system consisting of on-site and off-site supervision.

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The 2004 IMF FSSA notes that the MAS' supervision includes on-site inspections and off-site monitoring, the former based on the risk profiles and overall systemic importance of banks, and the latter based on the regularly submitted returns, internal audit reports, foreign supervisory reports, market information and discussions with management and auditors of banks . Nonetheless, there is insufficient information publicly available that directly addresses Singapore's compliance with this principle.

17. Regular contact with bank management and understanding of bank's operations.

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The 2004 IMF FSSA notes that the MAS schedules at least yearly meetings with the Board of Directors and senior management of banks to discuss operational matters and supervisory conclusions. It also holds bilateral meetings with external auditors twice a year, and more frequent meetings with middle management and internal auditors . Nonetheless, there is insufficient information publicly available that directly addresses Singapore's compliance with this principle.

18. Analytical reports and statistical returns on solo and consolidated basis.

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The 2004 IMF FSSA notes that the local banks are supervised on a consolidated basis, and prudential limits such as CARs and exposure limits imposed on a group basis, wherein the assets, liabilities, profits and losses are aggregated to cover all companies where the bank has major stakes. The Banking Act, the Company Act, and the MAS notices spell out record keeping and reporting requirements for banks . Despite the above descriptive information, there is scant information publicly available addressing Singapore's compliance with this principle.

19. Independent validation of supervisory information through on-site examination or external auditors.

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The 2004 IMF FSSA notes that the external auditor submits conclusions and recommendations pertaining to the banks' accounting systems, risk management and internal controls, asset quality, and non-compliance with laws and regulations. The MAS can also call for additional information, wider range of audit and more specific examination by the external auditor. MAS reviews the reports submitted by external auditors based on the annual audits of the banks, as part of its off-site supervision. These reports are then assessed during the on-site examinations of the MAS. The MAS also holds bilateral meetings with the external auditors twice a year . Nevertheless, there is insufficient information publicly available that directly addresses Singapore's compliance with this principle.

20. Ability to supervise on a consolidated basis.

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The 2004 IMF FSSA notes that the considerable overseas operations carried out by local banks "appear to be managed effectively and are supervised under the MAS' consolidated supervision framework" (p. 14). This framework incorporates supervising financial groups across their sectoral activities related to banking, insurance and securities, as well as supervising both the local and overseas operations of Singapore banks . Nevertheless, there is insufficient information publicly available that directly addresses Singapore's compliance with this principle.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

II

The 2004 IMF FSSA attests that the Singapore accounting standards are closely aligned to international best practices; and the country is taking ongoing initiatives to foster good corporate governance and strengthen disclosure practices . The FSSA also notes that the Banking Act, the Companies Act, and the MAS Notices spell out record keeping and reporting requirements for banks. Further, the Companies Act requires all companies to comply with the Financial Reporting Standards issued by the Council on Corporate Disclosure and Governance (replaced in 2007 by the Accounting Standards Council (ASC)); and the Securities and Futures Act places a statutory requirement for continuous disclosure on banks. The annual accounts of a bank must conform to the provisions of the Companies Act and the Financial Reporting Standards (Singapore's Statement of Accounting Standards) and must be audited by an external auditor who submits conclusions and recommendations pertaining to the banks' accounting systems, risk management and internal controls, asset quality, and non-compliance with laws and regulations. The MAS can also call for additional information, wider range of audit, and more specific examination by the external auditor. In addition, the bank is required to publish its most recent audited annual financial statements with the external auditor's report and file them with the Registry of Companies and Business . Despite the above descriptive information, there is scant information publicly available addressing Singapore's compliance with this principle.

22. Adequate supervisory measures to ensure timely corrective action.

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The 2004 IMF FSSA notes that the Banking Act empowers the MAS to take action against a bank for conducting activities that are potentially detrimental to the interest of its depositors, creditors, or the general public; or for its inability to meet its obligations. These include appointing an advisor to the negligent bank; directing another person to assume control of and carry out the business of that bank; changing or revoking the existing conditions of the license of the bank; or imposing conditions. Further, the MAS may also impose a fine or imprisonment on a director, managing director or manager of a bank in Singapore found guilty of failure to take steps to enable their bank to be compliant with all applicable laws, including the Banking Act, or to ascertain the accuracy of submitted statements . The FSSA also finds that the MAS is empowered, but not obligated, to provide lender of last resort facilities to a bank if it is found necessary to safeguard systemic stability . Despite the above descriptive information, there is scant information publicly available addressing Singapore's compliance with this principle.

The 2006/2007 annual report of the MAS states that in the event of a bank distress or insolvency, the MAS prefers to adopt "a private sector resolution option" (25). Also new provisions introduced in the Banking (Amendment) Act of 2007 give the MAS a wider range of resolution options to get more closely involved in the resolution process of a bank .

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

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The 2004 IMF FSSA notes that the considerable overseas operations carried out by local banks "appear to be managed effectively and are supervised under the MAS' consolidated supervision framework" (p. 14). This framework incorporates supervising financial groups across their sectoral activities related to banking, insurance and securities, as well as supervising both the local and overseas operations of Singapore banks. The MAS conducts onsite inspections of these operations and also holds annual bilateral meetings with host supervisors . Despite the above descriptive information, there is scant information publicly available addressing Singapore's compliance with this principle.

24. International exchange of information with other supervisors.

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The 2004 IMF FSSA notes that the MSA "maintains various information sharing arrangements" (p. 47) with host and home country supervisors of the banking sector. Further, the Banking Act permits the MAS to share supervisory information with foreign home supervisors, on the condition that confidentiality of the shared information is protected . Despite the above descriptive information, there is scant information publicly available addressing Singapore's compliance with this principle.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

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The 2004 IMF FSSA observes that "operations of systemically important foreign bank branches appear to be managed prudently" (p. 19). Further, the MAS applies the same risk-based supervisory approach to local operations of foreign banks as local banks. The Banking Act also allows home supervisors to conduct on-site examinations of foreign branches in Singapore and permits the MAS to share supervisory information with foreign home supervisors, on the condition that confidentiality of the shared information is protected . Despite the above descriptive information, there is scant information publicly available addressing Singapore's compliance with this principle.