OREANDA-NEWS.  Proposed enhancements to Singapore's bank resolution regime aim to address gaps in the authorities' toolkit to resolve distressed financial institutions, says Fitch Ratings. However, the proposed senior liability exemptions from statutory bail-in requirements, if adopted, will be one of the more supportive of senior creditors among the regimes that have been announced thus far, and will place a greater burden of loss absorption on subordinated capital classes in resolution.

Singapore's approach is broadly in keeping with Fitch's view of support philosophies across most of Asia, where regulators have shown less appetite than in the US and Europe to impose losses on senior creditors ahead of liquidation.

Fitch believes that the proposed senior bail-in exemptions aim to protect funding stability and preserving funding options for banks in times of market stress. However, the exemptions stand in contrast with Financial Stability Board (FSB) recommendations. As such, the proposed changes could fall short in reducing moral hazard, and may not reduce contingent sovereign exposure to the banking system in a crisis.

It is important to note that while there are no explicit statutory bail-in powers in the proposals, the possibility still remains for the Monetary Authority of Singapore (MAS) using existing tools to bail-in uninsured senior creditors if certain conditions warrant this - such as using a bridge bank or for creditors at the holding company level.

These proposals highlight Singapore's continued emphasis on robust internal risk-management practices by banks and prudential supervision to pre-empt the risk of bank failure, as well as strong loss-absorption capacity as a first line of defence to protect against unseen risks. Singapore has historically required banks to maintain capital buffers above international standards. But it is notable that additional loss-absorbency requirements being proposed globally may lead to other large global banks surpassing their Singapore counterparts in terms of loss-absorbing capacity.

Furthermore, the MAS may also raise capital requirements further for local banks; but in the absence of statutory senior debt bail-in, any additional loss-absorbency requirements may need to be addressed through increased issuance of Additional Tier 1 and Tier 2 capital - and perhaps even common equity. Market pressures may also prompt Singapore banks to issue more junior capital instruments to ensure they remain on a par with global banks. They have thus far issued SGD2bn and SGD5bn of bail-in-eligible AT1 and T2 securities, respectively, which equates on aggregate to only about 1% of risk-weighted assets.

The three Singaporean banks (DBS, UOB and OCBC), remain largely deposit-funded - deposits make up about 80% of total funding, based on Fitch's definition. Senior debt is also still a small (albeit increasing) component of funding, accounting for less than 10% of the total. Thus, the incremental cost of protecting senior debtholders in a resolution scenario would still be relatively modest in light of the banks' current funding structures.

The proposed regime is likely to leave support ratings for Singapore banks intact. This is in contrast with other jurisdictions such as Hong Kong, the EU and the US, where many support ratings have been recently downgraded with the implementation of new resolution regimes. Fitch currently assigns a support rating of '1' for Singapore banks, in line with the agency's belief in the sovereign's high propensity and ability to support banks. However, a greater willingness to bail in senior debt could lead to a downgrade of Singapore banks' support ratings and floors.

The proposals were released in a consultation paper published by the MAS last week. Other proposals in the paper are intended to meet key FSB recommendations that were not yet addressed in the MAS's toolkit.