MAS releases new Basel II rules

MAS says it will review the rules as necessary


EVEN as the new Basel II rules governing capital requirements for banks are released in Singapore, the Monetary Authority of Singapore (MAS) said it will monitor international developments and review them as necessary.

The MAS yesterday released Basel II rules in Singapore which seek to align capital requirements more closely with the risks that banks face.

The rules - four years in the making with extensive industry consultation - will take effect on Jan 1, 2008, the MAS said.

The MAS will implement the Basel II framework for Singapore - incorporated banks from Jan 1. They are Citibank Singapore Ltd, DBS Group Holdings, OCBC Bank and United Overseas Bank.

Basel II rules are global rules on capital requirements for banks and established by the Basel Committee on Banking Supervision in June 2004. The committee was made up of a group of central banks and bank supervisory authorities in the industrialised G-10 countries.

Singapore is among a number of developed countries to implement Basel II next year.

But already regulators in the United States and Switzerland said this week that the new rules may need tightening to reflect the current credit market turmoil caused by the US mortgage defaults crisis.

Said an MAS spokeswoman: 'The implementation of Basel II will make the minimum capital requirements for banks more sensitive (than under the current Basel Accord) to changes in banks' risk profiles, including risks arising from securitisation exposures.'

In addition, the public disclosure requirements under Basel II will improve the information available to the market on the risk profile of individual banks, including information on banks' securitisation activities.

'MAS will continue to monitor international developments and review its rules as necessary,' said the spokeswoman.

The Basel II framework, comprising three pillars, more closely aligns the minimum capital requirements for banks with the risks that they face.

Pillar 1 prescribes rules on how banks should calculate the minimum capital that they require to hold for credit, market and operational risks. Pillar 2 describes the accompanying supervisory review of a bank's internal capital adequacy assessment and encourages banks to continually develop their risk management techniques. Pillar 3 prescribes minimum disclosure requirements to facilitate market discipline.

The MAS's minimum Tier 1 and total capital adequacy ratios of 6 per cent and 10 per cent respectively remain unchanged.

MAS paving way for banks to buy mortgage insurance

THE Government is drafting new rules to pave the way for banks in Singapore to take up mortgage insurance for the first time.
Such insurance protects banks from the risk of borrowers defaulting on their mortgages, which make up a major chunk of banks' loans portfolio.

Some banks may implement mortgage insurance later next year, say industry players. This may be in anticipation of a surge in new mortgages when more properties are completed and home owners on deferred payment schemes take up loans.

Deferred payment schemes, which allow homebuyers to delay paying the bulk of a new home's price for up to a few years, have been popular here.

In response to The Straits Times' queries, the Monetary Authority of Singapore (MAS) said it is 'drafting the required legislation' for mortgage insurance. This follows the consultation paper it issued last October that set out the proposed regulatory framework for the business.

Almost every bank in Singapore has been in talks with mortgage insurers to cover borrowers with higher loan-to-value (LTV) mortgage, typically above 80 per cent. LTV refers to the loan amount as a percentage of the property's value.

Mortgage insurance, which is available widely in other markets such as the United States, Australia and Hong Kong, protects residential mortgage lenders against losses if borrowers default.

There are no mortgage insurers operating in Singapore but the MAS said it has 'received indications of interest from several internationally renowned' providers to open outlets here. Two firms thought to be eyeing the Singapore market are Hong Kong Mortgage Corp and one of the US' largest mortgage insurers, Genworth Financial.

The MAS declined to say when the legislation will be put in place but some bankers expect it to be 'quite soon', especially with concerns about defaults on higher-risk home loans.

'Against the backdrop of the subprime home loan crisis in the US, there is inadvertently more pressure on banks to take precautions with their mortgages,' said a banker.

While the risk of defaults is generally low here, there is still a danger that an economic downturn may affect the ability of borrowers, especially those on deferred payment schemes, to service their loans, he added.

Citibank Singapore business director Tan Chia Seng also noted that 'if property prices keep rising faster than increases in income, it may make sense for banks to consider additional tools for managing default risk, such as mortgage insurance'.

Banks now must set aside higher amounts of capital for mortgages with an LTV of more than 80 per cent.

But the banks will be able to reduce the amount of capital they set aside by buying mortgage insurance.

The MAS said it is 'prepared to apply a lower capital risk charge for high LTV loans with mortgage insurance as a risk mitigant'.

Banks may also decide to pass on some of the mortgage insurance costs to borrowers in the form of higher interest rates. In Hong Kong, all banks, including DBS, must take out mortgage insurance for loans with an LTV above 70 per cent.

But the MAS said it 'does not interfere with banks' decisions about whether or not to use mortgage insurance to mitigate mortgage risks'.

Even with the upcoming regulations, it is unclear whether mortgage insurers will pile into the Singapore market.

One Hong Kong player, PMI Group, noted that selling mortgage insurance in Singapore could be 'quite difficult'.

This is because 'mortgage pricing is quite low in Singapore and banks are very comfortable with the lending at the 80 per cent LTV,' said Mr Albert Ting, PMI Hong Kong's country manager. PMI is a reinsurer to Hong Kong Mortgage.

Another mortgage insurer, Radian Group, is understood to be in talks with several banks in Singapore. But its plans may be put on hold as it is currently facing massive losses of well over US$460 million (S$701 million) in sub-prime loan investments, said one source.