The Monetary Authority of Singapore has displayed an enviable track record for monetary and financial stability, implements coherent financial system oversight as a ‘super-regulator’, and has emerged as a pioneer in creating a framework to facilitate next-generation technological and financial innovation. Singapore’s de facto central bank has achieved this despite not having an inflation target or being independent of government – the current vogue for central banks.
The MAS started managing the country’s trade-weighted exchange rate, rather than by pursuing an inflation rate or monetary aggregate, back in 1981. The Singapore dollar nominal effective exchange rate (neer) allowed for a gradual devaluation of the Singaporean currency during the Asian financial crisis and the global financial crisis. More recently, when Singapore suffered a bout of negative consumer price index inflation from November 2014 to October 2016, the MAS eased its exchange rate policy in response.
But the Singaporean central bank notably tightened monetary policy during the past year. The slope of the Singapore dollar neer policy band was increased in April and then again in October 2018, after the MAS had pursued a neutral stance for the previous two years. The MAS described the move as consistent with “a modest and gradual appreciation path” of its policy band, and the decision was taken in the context of the gradual ascent of core inflation and solid economic growth (Singapore’s GDP increased by 3.3% in 2018). Core inflation from January to November 2018 averaged 1.7%.
“The MAS’s approach has been to normalise monetary policy in an incremental fashion in view of still-benign inflation and growing trade-related tail risks,” the MAS tells Central Banking. “In the short term, the policy band provides sufficient room for the Singapore dollar neer to accommodate modest shocks to the Singapore economy. Future adjustments to monetary policy will depend on how the economy evolves and the MAS’s updated assessments of inflation and growth prospect.”
‘No government pressure’
One challenge often levelled at the MAS is that it does not enjoy de jure independence. The MAS’s chairman is Singapore’s deputy prime minister, Tharman Shanmugaratnam, who was its finance minister from 2007 to 2015. His MAS deputy is Lim Hng Kiang, who, until April 30, 2018, was Singapore’s trade minister, and was previously the CEO of the Housing Development Board.
Therefore, it can be argued that it is hard to know if the MAS’s policy decisions are made by central bankers or by the non-central bank government officials.
But MAS managing director Ravi Menon has said that, while the central bank may not be independent of government, it is independent within government. “In the last 40 years, the government has consistently backed the MAS,” said Menon in a speech. “Never has the government pressured the MAS to: ease monetary policy; or give a licence to a bank that the MAS was not inclined to admit; or refrain from taking action against a financial institution that did not behave.”
Close dealings with a technically and strategically competent government can also have its benefits.
Singapore’s growing population and a limited supply of new land, coupled with an extended period of accommodative monetary policies in developed economies, would suggest its housing market is predisposed to price bubbles. But none has yet appeared, in part because of the MAS’s macro-prudential policies.
The MAS demonstrated its commitment to maintaining a sustainable real-estate market once more in 2018, when it tightened loan-to-value limits in July, after seeing a renewed bout of price rises, increased transaction volumes and aggressive land bids by property developers. It was the latest in a series of macro-prudential measures the MAS has implemented since 2010, often in co-ordination with fiscal and land-supply measures managed by other government agencies.
The policies seek to encourage financial prudence among property buyers and sound lending practices by banks. Other tools deployed include total debt servicing ratios and loan tenure caps.
This co-ordinated implementation of macro-prudential measures has, as noted by the Financial Stability Board (FSB) in its February 2018 peer review report, “helped to mitigate housing price appreciation and moderate household leverage” – although the MAS has been asked to clarify responsibility within the MAS for the formulation of its macro-prudential policies.
“The MAS has consistently been at the forefront of efforts to blend specific macro-prudential policy objectives within a backdrop of rigorous adherence to global regulatory standards,” Piyush Gupta, chief executive of DBS, South-east Asia’s largest bank, tells Central Banking. “This twin approach, pragmatically applied, has anchored Singapore’s financial sector for more than half a century.”
Enforcement and supervision
The MAS has made substantial progress in improving its supervision, resolution, anti-money laundering, enforcement, data analytics and technological oversight capabilities.
To enable a stronger focus on combating money laundering and terrorist financing, the MAS set up a dedicated anti-money laundering department in 2016, employing data analytics for risk surveillance and carrying out on-site inspections. In the same year, the MAS also centralised and strengthened its enforcement functions under a new enforcement department designed to enhance its investigative capabilities.
Notably, the MAS has taken action against a number of financial institutions and individuals linked to the alleged theft of funds from Malaysian state-owned development fund 1MDB. The 1MDB episode is a large, complex and sophisticated money laundering case (and potentially political sensitive) – and the MAS has taken a relatively tough line. It closed two banks, BSI and Falcon, fined eight banks (including large Singaporean institutions) and prosecuted individuals.
“BSI Bank is the worst case of control lapses and gross misconduct that we have seen in the Singapore financial sector,” said Menon in 2016, while he called upon financial institutions to “take their anti-money laundering responsibilities seriously”.
In general, the MAS has a strong recent record on supervision – particularly in the context of the significant growth of the Lion State’s financial sector during the past 20 years. While part of Singapore’s success lies in South-east Asian banks having not moved to the buy-and-distribute model adopted by US and European banks in the lead-up to the global financial crisis, it is also due to the MAS’s prudent regulation and capital standards. The MAS has committed to implementing the Group of 20 and FSB regulatory reforms, including increasing banks’ capital to absorb losses, strengthening liquidity buffers and constraining leverage by adopting the new Basel capital standard, liquidity coverage ratio and net stable finding ratio ahead of several major jurisdictions.
The MAS has made strides in changes to its legislative and regulatory framework in 2018 to allow for better efficiency and safety in the markets, while enabling market development
Loh Boon Chye, SGX
“The MAS has also made strides in changes to its legislative and regulatory framework in 2018 to allow for better efficiency and safety in the markets, while enabling market development,” says Loh Boon Chye, chief executive, Singapore Exchange (SGX). “Wide-ranging changes were introduced to the Securities and Futures Act to keep the Singapore capital markets regulatory framework in step with market developments and aligned with international standards and best practices.”
Notably, the MAS has further strengthened its regulation of over-the-counter (OTC) derivatives markets, with mandatory trade reporting, margin requirements for uncleared OTC derivatives trades and mandatory central clearing of interest rate swaps. The MAS tells Central Banking it will require the trading of OTC derivatives on organised markets, starting with globally liquid interest rate swaps denominated in US dollars, euros and sterling.
The changes also included stronger regulation of market operators, streamlining definitions of investment products and regulated activities, reclassification of retail investors, regulation of financial benchmarks, widening factors for recognising collective investment schemes constituted outside of Singapore and a stronger enforcement regime against market misconduct.
It also calibrated the regulatory framework to cater for new types of assets and market behaviour, including a new framework covering the corporate structure for investment funds, the Variable Capital Company, and payment services, as well as consultations on a tiered licensing structure for the Recognised Market Operator regime, and the creation of predefined sandboxes, known as Sandbox Express, to complement the existing FinTech Regulatory Sandbox, which the MAS launched in 2016.
“The breadth and depth of the engagement MAS has with the markets (including banks, insurance companies, brokerages, exchanges, clearing houses and payment systems) allows it to conduct its regulatory functions in a consistent and coherent manner across all segments,” says SGX’s Loh.
As part of ongoing work, the MAS has strengthened Singapore’s resolution regime for banks. The Singaporean central bank can now take control of a distressed financial institution, restructure its share capital, and transfer its assets, liabilities and businesses to another entity. It also has the power to force financial institutions to address deficiencies in their recovery plans and remove impediments to resolvability. The FSB’s peer review of Singapore’s resolution regime in February 2018 affirmed “good progress” has been made by the central bank, although the MAS continues to develop resolution plans for selected large insurers, and improve the recovery and resolution plans of financial market infrastructures.
“The MAS has further released a consultation in July 2018 to enhance its resolution regime, including powers for temporary stays on termination rights and bail-in of debts, among others,” says SGX’s Loh.
The MAS has also set up a behavioural sciences unit to apply techniques from behavioural psychology to increase the effectiveness of consumer policies as well as to assess the risk culture and conduct in the major financial institutions supervised by the MAS. It has established a technology risk supervision department to address “the potential risks posed by the growing use of technology in the financial sector, and to strengthen the industry’s cyber resilience”. In 2017, the MAS set up a data analytics group to harness the power of big data and data analytics to unlock insights, enhance the supervision of financial institutions and make regulatory compliance more efficient.
The supervisory technology initiatives are important because, unlike many of its developed world peers, the MAS has the role of developing Singapore’s financial services industry, so it needs to balance these efforts with prudent supervision.
“The MAS has sought to leverage on the strength and maturity of the Singaporean economy and financial infrastructure to build a Smart Financial Centre, where, as Ravi [Menon] has put it, ‘innovation and technology are pervasive’. They are one of the only regulators to have created a fintech division that has policy powers,” says Gupta.
For example, the MAS launched its five-year industry transformation map for the financial sector, designed to encourage business areas that provide growth opportunities and the ability for skill upgrading, as well as continuous innovation and technology adoption. The aim of this scheme is to achieve average increased financial sector growth of 4.3% over 2016–20 on an annual basis, and to help to create 3,000 financial services and 1,000 financial technology (fintech) jobs over the same period. By the end of 2018, the MAS was on track to hit these targets. The MAS says that, as of January 2019, about 1,500 at-risk workers in the consumer banking sector have benefitted from these efforts.
The MAS is likewise seeking to position Singapore as a leading global fintech hub, and has made notable progress since setting up its Fintech and Innovation Group, in 2015, which is designed to “encourage innovation and the use of technology in the financial industry to enhance efficiency, reduce risks, and strengthen competitiveness”. In addition, the central bank introduced an Artificial Intelligence (AI) and Data Analytics Grant, worth S$27 million (US$20.0 million), to support the adoption and integration of AI and data analytics in financial institutions.
The MAS is also developing a swift, secure and seamless electronic payments, including the Singapore Quick Response Code – which it claims is the world’s first unified payment QR code. Singapore was a relatively early mover in retail e-payments, adopting Fast and Secure Transfers (Fast) – an electronic funds transfer service that allows customers to transfer money between bank accounts 24/7 and in real time – in March 2014. Building on Fast’s infrastructure, MAS worked with the payments industry to introduce PayNow, a peer-to-peer fund transfer system that allows for transfers using only a mobile number or a national ID number. There are more than 2.3 million PayNow registrations to date, relative to Singapore’s 4 million residents. PayNow is now also available for businesses, corporate entities and government agencies to use apart from individual account holders, and MAS says more than 70,000 businesses have registered their unique Entity numbers on PayNow. More than S$3.5 billion of funds have been transferred through PayNow since its inception.
The MAS pioneered Project Ubin, a project using distributed ledger technology (DLT) with the aim of developing more efficient and simpler-to-use alternatives for cross-border payments and settlement of assets. Ubin offers a template using central bank digital currency for decentralised interbank payment and settlements with liquidity saving mechanisms, and the central bank has publicly released its source codes and technical documentation. A breakout project under Ubin with SGX developed delivery versus payment (DvP) capabilities for settlement of tokenised assets across different blockchain platforms. It demonstrated DvP settlement finality, interledger interoperability and investor protection may be achieved by solutions designed and built on blockchain technology. Now in its third phase, the project will focus on new methods to conduct cross-border payments using central bank digital currency in a tie-up with the Bank of Canada.
Perhaps more importantly, the MAS has developed guidelines for industry’s adoption of cloud computing services and a set of principles for data governance and the responsible use of AI in financial services.
In addition, it set up programmes to develop a strong talent pool in fintech. Working with the Massachusetts Institute of Technology’s Media Lab, the MAS facilitated local talent to work alongside world-class researchers on DLT, cryptography, big data and AI. The MAS has also formed partnerships with a number of official-sector institutions, including the Bank of Thailand, the Association of Supervisors of Banks of the Americas, Abu Dhabi Global Market and the Central Bank of Egypt.
In collaboration with the Smart Nation and Digital Government Office and the Government Technology Agency, a national digital identity with electronic ‘know-your-customer’ capabilities has been developed for seamless and secure authentication of residents. It enables residents to authorise access to government-verified data for financial institutions to onboard customers and make business decisions relating to those customers. The MAS also encourages innovation through its API Exchange, an online global fintech marketplace and sandbox to enable financial institutions and fintech firms to connect to one another, collaborate on experiments and drive the adoption of application programming interfaces for digital transformation and financial inclusion.
This proactive stance convinces me that MAS takes the term ‘pervasive’ seriously. As the CEO of a major Singapore bank that is also on a transformational journey, I cannot ask for a more agile, informed, collaborative and visionary central bank as a partner
Piyush Gupta, DBS
“The outcome of the MAS’s sustained and consistent efforts is that Singapore is regarded as one of the largest fintech hubs in the world,” says SGX’s Loh. “The MAS also hosts the annual FinTech Festival, also in its third year running, which has become the largest fintech event in the world.”
“This proactive stance convinces me that MAS takes the term ‘pervasive’ seriously. As the CEO of a major Singapore bank that is also on a transformational journey, I cannot ask for a more agile, informed, collaborative and visionary central bank as a partner,” adds DBS’s Gupta.
While it is premature to assess whether all these efforts will be successful – and there are some clear risks associated with the MAS’s pioneering role in fintech development – the Singaporean central bank’s efforts to upskill its staff and its proactive attitude toward new technology, combined with a long track record of success in monetary policy and financial stability, clearly distinguish it from many of its peers.
The Central Banking Awards were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Rachael King, Victor Mendez-Barreira, Joel Clark, William Towning and Tristan Carlyle