The Monetary Authority of Singapore (MAS) released details of changes to the capital adequacy requirements for Singapore-incorporated banks on February 8 2007.
Effective from March 1 2007, MAS will lower the core capital adequacy ratio (CAR) requirement from 7% to 6%. The total CAR requirement will remain unchanged at 10%. MAS will also recognise a wider range of instruments as Tier 2 capital. These instruments can be of a shorter maturity and do not necessarily have to provide for deferment of coupons or write-down of principal. Up to 50% of Tier 2 capital can be made up of such instruments.
The moves to relax the capital requirements are aimed to strike a "judicious balance" between meeting MAS's prudential objectives and providing the banks with ample room for efficient capital management. The changes will allow the banks more flexibility in making loans and investments. They will also help to free up much-needed capital which the banks could deploy to enhance their competitive position.
Readers may be aware that MAS's minimum capital adequacy requirements for Singapore-incorporated banks are based on the capital adequacy framework established by the Basel Committee for Banking Supervision in its report International Convergence of Capital Measurement and Capital Standards commonly known as the 1988 Basel Capital Accord.
The Basel Accord prescribes minimum tier one and total CAR, both of which are ratios of regulatory capital to risk weighted assets.
The detailed rules for computing CAR can be found in MAS Notice 637, Risk Based Capital Adequacy Requirements for Banks Incorporated in Singapore, which is available on the MAS website.