Second, it remains unclear if structural reform measures can make a bank or banking group safer if a culture of excessive risk-taking is not curtailed and if risk governance frameworks are not strengthened. MAS subscribes to the universal banking model on the premise that it is not the separation between risky and non-risky activities that matters as much as ensuring that risk is well managed wherever it is. •  For domestic banks, MAS does not impose any structural measures. The focus is instead on ensuring that their risk management capabilities are commensurate with the complexity of their activities and that capital and liquidity buffers are healthy. •  For foreign banks that have a significant presence in the retail market, MAS will require local incorporation of their retail operations. The banks can choose to subsidiarise their entire operations within the same legal entity or continue to operate its wholesale banking business under a branch structure. There is no retail ring-fence required. Unintended consequences It is imperative that we press on with the regulatory reform agenda and not succumb to reform fatigue. But even as we do so, we need to be mindful of unintended consequences. Inconsistent implementation of rules The first unintended consequence is the inconsistent application of rules across jurisdictions and across sectors. Inconsistent application of rules across jurisdictions leads to the risk of regulatory arbitrage. Take for example, the new capital rules.
•  First, it raises the quantity of capital that banks must hold. By providing a buffer for banks to absorb losses, capital helps to minimise spillovers to the rest of the system. •  Second, Basel III raises the quality of capital that banks must hold. The crisis has shown that common equity is the most effective capital instrument to absorb losses and write-downs. •  Third, Basel III brings back to banks’ balance sheets many off-balance sheet exposures and applies appropriate capital charges on them. Many banks that had to be rescued in 2008 had capital adequacy ratios well in excess of the minimum requirements then. They got into trouble because they had many risky off-balance sheet exposures they did not hold capital against. Singapore has fully implemented the Basel III capital requirements, two years ahead of the timeline prescribed by the Basel Committee. And by 2015, Singapore-incorporated banks will meet capital requirements which are 2% points higher than the Basel III minimums – in effect a surcharge to reflect their systemic importance in our economy and financial system. There is no global capital standard for the insurance industry. This is a lacuna that needs to be plugged. But the International Association of Insurance Supervisors (“IAIS”) has taken the lead to formulate standards for a risk-based solvency regime for insurers. The EU has built on this to develop detailed capital standards known as Solvency II. Many jurisdictions are reviewing their rules with the intent to align with IAIS standards.