Regulation of Internet Banking - International Law Office

Licensing New Banks
Reduced Minimum Capital
Risk-Focused Supervision

The Monetary Authority of Singapore (MAS) has recently announced its approach to the licensing, regulation and supervision of internet banking in Singapore.

The position adopted by the MAS is that the risk considerations inherent in internet banking are neither new, nor fundamentally different from those found in other forms of banking. Internet banking, including internet-only banks (IOBs), will therefore operate within the same prudential framework as traditional banking. The MAS' admission criteria for new licence applicants, and its regulatory and supervisory approach, will apply across the board.

Licensing New Banks

Existing policy already allows all banks licensed in Singapore to use the Internet to provide their services. The MAS announced that it is prepared to grant new banking licences to Singapore-incorporated banking groups to set up banking subsidiaries to pursue new business models, including IOBs. This will allow a bank to decide whether it wants to engage in these activities within the bank or through a separate subsidiary.

If a Singapore-incorporated bank chooses to have a joint venture partner in setting up the subsidiary, the MAS will require the bank to have ultimate control over the venture. The MAS will also assess the suitability of the joint venture partners, taking into account various factors (including reputation, track record and financial soundness).

The MAS is also prepared to admit branches of foreign-incorporated IOBs within the admission framework for foreign banks. The MAS' admission framework allows admission of new or non-traditional players. These banks may be owned either by existing banks, or by non-bank players. New or non-traditional foreign banks will have to meet the same entry requirements as traditional banks. New banking players who lack an established track record will still be considered, provided they have strong compensatory factors in respect of the other criteria. However, the MAS will always require new players to be incorporated in jurisdictions with a strong regulatory environment, and to have a home supervisor willing to co-operate in the MAS' supervision of the bank.

The MAS will continue to issue offshore banking licences to foreign banks that meet its admission standards. New players applying for full or restricted banking licences will have to compete with other foreign banks for licences awarded under the MAS' liberalization programme for the domestic banking sector.

Reduced Minimum Capital

The Banking Act requires a Singapore-incorporated bank to have paid-up capital of S$1.5 billion. For banking subsidiaries whose Singapore parent banks have already met the S$1.5 billion requirement, a reduced minimum paid-up capital of S$100 million will be imposed. This is provided the parent bank has control over the subsidiary. The lower minimum paid-up capital requirement will apply to all Singapore-incorporated bank subsidiaries. In addition to the paid-up capital requirement, all banking subsidiaries will continue to be subject to the MAS' minimum capital adequacy ratio requirement of 12%.

For a parent bank to have control over the subsidiary, various factors must be satisfied:

• The Singapore parent bank must maintain more than a 50% shareholding in the subsidiary bank. After the subsidiary has become well-established and demonstrated its viability, the MAS may consider allowing the parent's shareholding to fall to 50% or below (although the parent bank must retain the largest shareholding and effective management control of the venture).
  
  
• The chairman of the subsidiary bank must be appointed by the Singapore parent. This is in addition to the requirements under MAS' Notice 622, regarding nominating committees and the appointment of directors and chief executives of Singapore-incorporated banks.
  
  
• The Singapore parent bank and any alliance partners involved must furnish letters of undertaking pledging their support for the new subsidiary bank. For a joint-venture partner, the letter of undertaking must be provided by a party acceptable to the MAS (either the partner itself, or one or more of its parent or associated companies).

Risk-Focused Supervision

The MAS stated that its current framework for prudential regulation and supervision provides flexibility for innovation in new business models and technologies. There seems to be no need for a new prudential framework to manage or mitigate the risks involved in internet banking. However, certain types of risk will be accentuated in internet banking, requiring (i) greater attention by the banks, and (ii) greater supervision by the MAS. Given the different models of internet banking, a risk-focused supervisory approach to individual banks is more suitable than 'one-size-fits-all' regulation. Depending on the overall risk profile of the individual bank, the MAS may require the bank to take additional precautionary measures to mitigate these risks.

The MAS also stated that banks are responsible for assessing and managing the risks associated with their operations, including the adoption of new technologies and business models. Bank management must pay special attention to the security, technology-related, liquidity and operational risks that may be accentuated in internet banking, whether offered within existing banks or in stand-alone entities such as IOBs. IOBs may also face higher business risks arising from their new business models and will have to manage these risks through a detailed and robust system of performance measurement. The MAS will require public disclosure of these undertakings as part of the requirement that all banks enhance disclosure of their risk management systems.

For further information on this topic please contact Tan Lai Huat at Shook Lin & Bok by telephone (+65 535 1944) or by fax (+65 535 8577) or by e-mail (tan_laihuat@shooklin.com.sg).

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