So, in other words, not only will banks get lower capital requirements in respect of lower risk credits; but they’ll also get lower capital requirements if they can demonstrate that they manage risk well. It is for this reason that Basel II might perhaps be better thought of not as the second “Capital Accord” but rather the first “Risk Management Accord”. Because it focuses attention not only on the more accurate measurement of risk, but on the management of risk. Banks looking to reduce their capital charge will have two choices: either reduce the risk, for example by substituting better risk credits for lower risk credits, or by reducing positions; or simply manage the risk better. And this will apply not only to credit risk. Again, to take the example of operational risk, banks will have the option of investing in more advanced approaches which will translate into lower capital charges. You may have noticed that I just mentioned banks having options, having choices. This is another key feature of Basel II. No longer will there be a “one size fits all” approach whereby banks of varying shapes and sizes are shoehorned into one inflexible system of capital charges. Instead, banks will be able to choose what approach they take; for example, whether they adopt the standardised approach or IRB approach for credit risk, and which of the various approaches to operational risk they adopt.
The sandbox serves two purposes: First, it allows experiments to take place, even where it is not possible at the outset to anticipate every risk or meet every regulatory requirement. Second, it provides an environment where if an experiment fails, it fails safely and cheaply within controlled boundaries, without widespread adverse consequences. How will the sandbox work? MAS and the applicant will jointly define the boundaries within which the experiment will take place. MAS will then determine the specific legal and regulatory requirements which it is prepared to relax for the duration of the experiment within these boundaries. We have received several sandbox applications since June, from FIs and FinTech players. The proposals leverage a range of technologies including distributed ledgers, machine learning, and big data analytics. MAS is reviewing the applications and looks forward to having some of these proposals launched in the sandbox soon. Meanwhile, we will be issuing today our finalised regulatory sandbox guidelines, incorporating feedback from the industry and road-tested against the actual sandbox applications we have received. Strengthening Cyber Security A smart financial centre must be a safe financial centre. As more financial services are delivered over the Internet, there will be growing security and privacy concerns from cyber threats. Users will have confidence in new technologies and innovative services only to the extent they have confidence in cyber security. Strengthening cyber security is therefore an important part of Singapore’s FinTech agenda. MAS works closely with other government agencies and the industry to help ensure cyber-defences are robust.