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Lion City to make regulator more powerful

Chris Hamblin, Editor, London, 10 May 2017


A Monetary Authority of Singapore (Amendment) Bill has now been presented for its first reading in the city-state's parliament. It arrogates more power to the regulator than before, especially in the area of 'bail-ins.'

The Government is introducing legislative amendments to strengthen the Monetary Authority's powers to 'resolve' distressed financial institutions in an orderly manner, especially (and this is most pertinent to HNWs and their wealth managers) a statutory bail-in regime.

'Bail-ins,' a term devised by the Economist magazine, are a far cry from normal bankruptcy proceedings where strict rules apply and a court-supervised process ranks creditors in order of repayment precedence, with creditors in each group being treated equally. Forbes contributor Nathan Lewis has described them as "another crony bankster scam."

Lewis has written: "The difference with the 'bail-in' is that the order of creditor seniority is changed. In the end, it amounts to the cronies (other banks and government) and non-cronies. The cronies get 100% or more; the non-cronies, including non-interest-bearing depositors who should be super-senior, get a kick in the guts instead."

Readers will remember that in Cyprus, HNW depositors (most of them Russian) saw 37.5% of the value of their uninsured deposits converted to equity. Financial institutions (e.g. German banks and central banks including the Bundesbank), along with government entities, received full repayment. It is to be hoped that the experience of HNW depositors in Singapore will be better than this when the time comes, and come it will.

The Bill contains amendments to empower the MAS to write down (or convert into equity) instruments issued after the effective date of the bail-in regime, so as to absorb losses or recapitalise this-or-that distressed financial institution. According to an MAS press release, the types of financial institution and instrument to which the bail-in regime is to apply "will be prescribed in subsidiary legislation at a later date." Readers may find this worrying, especially as the Bill in its present form says that the regulator, when exercising its statutory bail-in powers, should only "have regard to the principles of respecting the hierarchy of claims in liquidation." This does not say what 'the' hierarchy is - whether it is the hierarchy that normally pertains under Singapore's law or whether it is the hierarchy that pertained during the bail-ins in Cyprus or Greece. In fact there appears to be a compromise between the two alternatives. The Bill purports to provide creditors and shareholders who, according to the MAS, obtain less through 'resolution' than they do through a normal Singaporean liquidation with a right to compensation for the difference. This provision, the regulator insists, is in line with a “no creditor worse off than in liquidation” principle that it has published elsewhere. Resolution - a term unknown in 2008, according to the Bank of England - is the process by which the authorities can intervene to manage the failure of a financial firm.

According to the language that the MAS uses, it evidently thinks that liquidations are not bail-ins. This is not always the attitude of governmental organisations, however. The words of the European Parliament on the more recent Greek experience are revealing: "On 18 December 2015 the Bank of Greece put the Co-operative Bank of Peloponnese in resolution, since it was not able to remedy its capital shortfall. The transfer of deposits to National Bank of Greece (following a tender process) was financed by the Greek resolution fund. All the assets and remaining liabilities, as well as shareholders, were put into liquidation and therefore bailed-in."

The MAS also says that its Bill only proposes to make it "have regard" to the equal treatment of creditors of the same class, and not to force it to treat creditors equally without a shred of ambiguity.

Allowing financial institutions to fail in an orderly manner

The Bill proposes to consolidate the MAS’s powers to impose "resolution planning" on pertinent financial institutions. It also proposes to take away counterparties’ rights to terminate contracts with pertinent financial institutions if these rights arise solely by reason of the financial institutions' "entry into resolution." It also provides for new powers to help the MAS stay the early termination or acceleration rights of counterparties to contracts signed with a pertinent financial institution over which the regulator has exercised its "resolution powers."

Cross-border recognition of resolution activity

The Bill contains a mechanism by which the MAS can 'recognise' all or part of any resolution-related action taken by foreign authorities towards financial institutions in Singapore. The word 'recognise' obviously takes on a different meaning from its normal one in the eyes of the MAS in this context, but on this occasion the regulator is not in the mood to provide the reader with clues.

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