It acts like a stop-gap to constrain the overall size of the balance sheet, especially given the uncertainty involved in the risk models that banks use to calculate their capital needs. But the leverage ratio – precisely because it is a non-risk based measure – cannot be a substitute for risk-based capital requirements and should not be set at too high a level as to become the binding constraint on banks. If it were so, banks may have the perverse incentive to increase their exposure to risky assets so as to earn a higher return on capital. The final calibration and definition of the leverage ratio is expected to be finalised in 2017, with the minimum leverage ratio requirement coming into effect in 2018. Singaporeincorporated banks can comfortably meet the current testing minimum of a 3% leverage ratio. 2  BIS central bankers’ speeches  Making OTC derivatives trading safer The fourth fundamental area of reform is in the OTC derivatives market. The crisis highlighted how the opaque inter-connections across financial institutions engaged in trading complex derivative contracts over-the-counter led to rapid contagion and systemic crisis when liquidity suddenly dried up. Reforms have focused on four areas: standardisation of derivative contracts; central clearing; higher margin requirements for non-centrally cleared trades; and mandatory reporting of all trades. In particular, reporting to trade repositories will provide much-needed transparency on exposures across market participants. MAS has taken steps to implement the trade reporting regime in Singapore.
This has been consistently confirmed by the Central Bank’s latest stress tests aimed at assessing the resilience of domestic banks to the adverse effects of the pandemic. Such tests featured extensively in our Financial Stability Report and in the Interim Report. The resilience of our banks, as the current spread of the pandemic continues to unfold, is truly a testimony that prudence is the best response to the high level of uncertainty created by this shock. As a result of the pandemic, the ECB, national central banks, and the regulatory authorities have all launched a number of measures aimed not only at supporting the economy, but also in part directed at encouraging banks to utilise the capital and liquidity buffers built up in recent years to deal with crisis situations that arise.