Burden of rescuing failed banks in Singapore likely to rest on MAS, shareholders: Moody's

The Monetary Authority of Singapore building in Shenton Way.
The Monetary Authority of Singapore building in Shenton Way.PHOTO: ST FILE

SINGAPORE - The Monetary Authority of Singapore (MAS) is more likely to resolve a failing bank by getting equity holders to pay the price than by forcing creditors to accept haircuts, Moody's Investors Service has said in a report.

Citing a recent review of the Singapore financial system by the Financial Stability Board (FSB), Moody's noted that Singapore's framework for "bail-ins" covers a narrow band of liabilities, which would limit the framework's ability to get creditors to share the pain in a default situation.

At the heart of the issue is the question of how to handle a failing bank. Before the European debt crisis, the typical response from a central bank may have been a bailout, in which the central bank or some other party injects capital into the troubled lender in exchange for equity. This allows creditors to get paid, but dilutes existing equity holders and exposes the rescuer to ownership risk.

But in recent years, the "bail-in" has gained prominence as an alternative solution. In this case, creditors bear the bulk of the rescue cost by either taking a haircut on their claims, or by restructuring their debt to longer maturities or to equity.

Singapore's bail-in framework excludes senior debt from the pool of "bail-in-able" liabilities. Both FSB and Moody's have noted that this will limit the ability of the MAS to carry out an effective bail-in if one of Singapore's major banks gets into trouble.

Moody's acknowledged that the limitation is mitigated by the fact that the MAS is more focused on macroprudential policies and high regulatory standards that can prevent the need to rescue a bank in the first place. Indeed, Singapore's banks have the highest baseline credit assessments by Moody's in the world.

However, when push comes to shove, the narrow scope of Singapore's bail-in framework would render it "non-operational", the credit ratings agency said.

"Under the resolution regime in its current form and in the absence of a meaningful buffer of bail-in-able liabilities, we believe the MAS would likely resolve a failing domestic bank through a bailout," Moody's said.

In response, an MAS spokesman on Tuesday said the strength of a bank and its resolvability - or steps governing a failure in an orderly manner - needs to be seen in the context of high regulatory standards as the first line of defence, as Moody's report had noted.

"This includes liabilities that can be bailed-in as well as Singapore's capital requirements that are 2 percentage points higher than Basel standards, rigorous stress testing and close supervisory oversight.

"In designing the scope of the bail-in regime, MAS has carefully considered the trade-offs between a broader scope of bail-in - which would increase the loss-absorbing capacity of a bank - and the higher risk of contagion to the financial system and households."

The spokesman noted, for instance, that one European country recently decided not to bail in small savers despite having the powers to do so.

"MAS will review the implementation experience internationally to assess if any change to our bail-in scope is warranted.

If a bank here were to fail, MAS will first look for a private sector solution to minimise moral hazard and to instil market discipline.

"In the absence of viable private sector solutions, and where assisted resolution strategies are needed, the use of any public funds will be accompanied by stringent conditions. These include subsequent recovery of resolution costs from the industry, as appropriate."