BIS central bankers’ speeches  1  Singapore was among the first jurisdictions in Asia to introduce a risk-based capital (“RBC”) framework for insurers, in 2005. In 2012, MAS embarked on a review to enhance the framework, known as “RBC 2”, to take into account the new IAIS standards and best practices, including relevant aspects of Solvency II. MAS will be conducting a quantitative study to assess the impact on the insurance industry of the proposals under RBC 2. There are no global capital standards for capital markets services providers. The International Organisation of Securities Commission (“IOSCO”) has, however, set out principles for the solvency of securities market intermediaries. Based on these principles, MAS has implemented a risk-based capital framework for capital markets services licensees. Strengthening liquidity buffers The second important area of reform is setting – for the first time – international standards for bank liquidity. Banks are in the business of transforming short-term liabilities (mainly deposits) into long-term assets (mainly loans). This fundamental mis-match in maturity opens banks to the risk that they may not be able to finance short-term liabilities as they fall due. Even solvent banks with lots of capital can fail if liquidity risks are not well-managed. The new Liquidity Coverage Ratio (“LCR”) sets the global minimum standard for bank liquidity. Essentially, the LCR framework requires banks to have an adequate stock of high quality liquid assets that can be converted into cash to survive a 30-day period of stress. In Singapore we have had liquidity rules for a long time.
It may be the case that the post-crisis financial system may not be adequately structured to provide certain types of long-term financing. •  First, longer-term corporate and project finance loans already attract a higher capital charge compared to short term loans. Coupled with the increased overall capital requirements under Basel III, this may create a disincentive for long-term loans. •  Second, to meet liquidity requirements, banks may substitute long-term lending activities with short-term lending. In calculating the Net Stable Funding Ratio, lower weights are assigned to loans with maturities of less than a year. •  Third, Solvency II, which will impose higher risk charges on longer-dated assets, may result in insurers de-risking by taking on shorter-dated assets. •  Fourth, the interaction between central clearing, margining and capital requirements may impact the variety and liquidity of some derivatives such as long-dated interest rate swaps used to hedge risks associated with long-term financing. 6  BIS central bankers’ speeches  There may be scope for some intelligent, risk-sensitive fine-tuning of regulation: •  The design of risk weights for insurers should not penalise them for holding good quality long term assets, if they are matched by long term liabilities. •  The preferential treatment of sovereign debt in bank regulation should be reexamined, so that banks are not disincentivised from holding good quality, long term corporate debt. •  Better calibration of the risk weights for securitisation for banks and insurers may be necessary.