Holders of senior debt from banks will have reason to breathe easy if the Monetary Authority of Singapore (MAS) implements proposals to limit its statutory bail-in framework to subordinated debt.
The proposals, part of a set of proposed enhancements to the bank resolution regime, will turn Singapore into one of the most investor-friendly nations for senior bank debt, as opposed to the approach favoured in Europe and elsewhere in the world.
Many countries have introduced legislation that forces senior bondholders to share losses if a bank becomes unviable, adding another buffer to protect taxpayers and depositors.
Instead, Singapore is limiting the use of bail-in powers to subordinated debt, which is already loss-absorbing under Basel III, effectively pledging to support senior bondholders if a bank fails.
"In Europe and the United States, 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," said Mr Eugene Tarzimanov, Moody's vice-president and senior credit officer.
"In Asia, where governments are supportive of the banks, we think the bail-out approach is still preferred."
The MAS is concerned that bailing in a bank's senior creditors will lead to contagion across the financial system and increase the affected bank's funding costs. On the other hand, Singapore-incorporated banks are extremely well capitalised and are already subject to very strict capital standards, which mitigate the risks of loss-absorption.
The central bank currently requires Singapore lenders to maintain a common equity Tier 1 (T1) of 9 per cent by 2019, which is 2 percentage points higher than the level that the Basel Committee requires under the new-style bank capital framework. In practice, Singapore-incorporated banks have an average common equity T1 ratio of 12 per cent to 13 per cent, says Moody's. In view of this, the MAS is proposing that the statutory bail-in regime be applied to unsecured subordinated debt and loans issued or contracted after related laws come into force.
This means senior unsecured debt, legacy subordinated debt and deposits will be excluded from the bail-in regime.
This is in contrast to other existing and planned bank resolution regimes in the rest of the world.
The MAS proposals also call for bail-in to be effective only on subordinated debt issued after bail-in laws are in place. REUTERS