Singapore law allows creditors to avoid losses from bank failures: Moody's

Buffers for bail-ins only comprise 1%-2% of Singapore banks’ assets.

According to Moody’s Investors Service, the Monetary Authority of Singapore (MAS) would likely save a failing domestic bank through a bailout, meaning the burden to save a bank would fall only on investors instead of creditors.

It said in a report that this is because subordinated buffers for bail-ins in Singapore are thin and are only part of 1%-2% of the assets at DBS, OCBC, and UOB. Through bail-ins, creditors would be able to share the burdens and losses with shareholders when a bank fails.

“There is no requirement yet for Singaporean banks to increase bail-in-able buffers, such as through the issuance of external loss absorbing (LAC) instruments,” it added.

Moody’s noted that the Financial Stability Board (FSB) acknowledged that Singapore has made “good” progress in bank resolution reform, but its effectiveness may be limited because of a narrow scope of liabilities that can be bailed in. “The FSB's assessment of the enhanced resolution statute's shortcomings is in line with our view that the new regime is non-operational in terms of spreading losses across a wider pool or creditors,” the agency added.

MAS’ upcoming legislation, which is expected to take effect in 2018, includes a power to impose a temporary stay on the exercise of early termination rights. This serves as a framework for the cross-border recognition of foreign resolution actions and resolution funding arrangements.

However, the limited pool of bail-in-able debt curtails the resolution framework's effectiveness. FSB recommended that senior debt be included. “Under the new resolution legislation, liabilities bail-in-able by statute include subordinated debt and unsecured subordinated loans issued after the statute is enacted,” Moody’s added.

Moody’s thinks one reason the MAS is not focused on bail-in of senior debt may be that its primary concern is to prevent the need for any bank resolution through macroprudential measures and high regulatory standards, particularly for bank capital.

“The FSB also recognized these efforts, saying in the review that macroprudential policies have effectively contained risks in the property and household sectors,” it added.

Moody’s weighed in that the MAS’ reasons for narrowly defining bail-in-able liabilities are to avoid the risk of market contagion and higher bank funding costs. It also wants to remove uncertainty that could arise from bail-ins of senior debt.

As for the first issue, the board suggested that the MAS can partially mitigate contagion risk with regulations that limit banks’ investments in bail-in-able instruments whilst noting that higher funding costs are a consequence of global bank resolution reforms to remove market expectations of implicit public support for large banks. Regarding the second MAS concern, the FSB said that the regulator can remediate such uncertainty through changes in creditor hierarchy, the use of a holding company structure or statutory exclusions of some liabilities from bail-in.