Speaking at the 4th Pan Asian Regulatory Summit, Menon said Singapore favoured the universal banking model and contrasted the US position with that of the UK and the EU.
In the US, the Volcker rule prohibits US-operating banks from engaging in proprietary trading or from acquiring or retaining an ownership interest in a hedge fund or private equity fund.
In the UK, the Vickers Commission recommends ring-fencing retail banking activities, and subjecting the ring-fenced entity to higher capital requirements.
In the EU, the Liikanen report proposes a mandatory fencing off of banks’ proprietary trading and market making activities from the rest of the banking group, if the activities exceed a certain threshold, with higher capital charges imposed on the investment banking ring-fence.
Menon said: “To the extent that structural measures help to simplify business models and facilitate the resolvability of very large and complex global banking groups, they can help to reduce the risk and impact of failures. But it is not clear if the benefits of such measures outweigh the costs in all instances.”
He argued that it is worth considering whether size or complexity are the critical factors: “The global financial crisis started not with large universal banks or large global banks, but with narrow or specialised players: Northern Rock in the UK, and investment banks like Bear Stearns and Lehman Brothers. Interestingly, the Liikanen report observed that there was no business model that performed particularly well or poorly during the crisis.”
It also “remains unclear if structural reform measures can make a bank or banking group safer if a culture of excessive risk-taking is not curtailed and if risk governance frameworks are not strengthened”.
The MAS subscribes to the universal banking model on the premise that it is not the separation between risky and non-risky activities that matters as much as ensuring that risk is well managed wherever it is.
For domestic banks, no structural measures are imposed, the focus instead being on ensuring that their risk management capabilities are commensurate with the complexity of their activities and that capital and liquidity buffers are healthy.
For foreign banks that have a significant presence in the retail market, the MAS requires local incorporation of their retail operations. The banks can choose to subsidiarise their entire operations within the same legal entity or continue to operate its wholesale banking business under a branch structure, and there is no retail ring-fence required.
Menon said it was “imperative that we press on with the regulatory reform agenda and not succumb to reform fatigue” but also mindful of unintended consequences such as the “inconsistent application of rules across jurisdictions and across sectors”.
“We must not forget that regulation must be complemented by rigorous supervision and sound risk management. We cannot rely too much on regulation alone to make finance safer,” he concluded.
