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Singapore proposes to protect senior bondholders in bank failures

The Monetary Authority of Singapore (MAS) has proposed changes to its bank resolution regime that would protect senior bondholders if a bank fails.09 Jul 2015

MAS proposes following the lead of the US, the UK and Germany in introducing statutory bail-in powers for failing financial institutions, it said in a consultation paper on 'Proposed enhancements to resolution regime for financial institutions in Singapore'.

However, the proposals also call for bail-in to be applied only to subordinated debt issued after the bail-in laws are implemented.

Statutory bail-in powers let authorities write down unsecured and uninsured creditor claims or convert them into equity. This helps to recapitalise a financial institution to "ensure continuity of its critical functions, reduce the use of public funds and maintain public confidence in the financial system", MAS said.

In many countries, senior bondholders share in losses if a bank fails. Instead, Singapore will limit its bail-in powers to unsecured subordinated debt and loans, according to the consultation paper.

In doing this, MAS said it is considering the possibility of 'contagion' to the financial system and the broader economy if losses are imposed on creditors of the bailed-in bank, and the impact on the bank's cost of funding, it said.

Singapore-incorporated banks are also well-capitalised and subject to stricter capital standards that EU banks, MAS said.

"They are also subject to rigorous stress testing requirements, close supervisory oversight and processes to allow for timely intervention by MAS in a range of stress situations. These factors strengthen the resilience of Singapore-incorporated banks under stress conditions and argue for a less encompassing bail-in regime," MAS said.

"In Europe and the US, where taxpayers were tapped to bail out banks during the global financial crisis, it is now the bail-in approach that is preferred in case banks run into difficulties," Eugene Tarzimanov, Moody's vice president told Reuters.

"In Asia, where governments are supportive of the banks, we think the bail-out approach is still preferred," he said, according to the report.

MAS proposes to first apply the statutory bail-in powers to Singapore-incorporated banks and bank holding companies, but will continue to monitor international developments before considering a bail-in regime for the non-bank financial sectors, it said.