Banking: Why Moody's turned negative

Banking: Why Moody's turned negative

SINGAPORE - Earlier this week, when international rating agency Moody's Investor Service revised its outlook on Singapore's banking system from "stable" to "negative", many in the country were concerned.

Did it mean that Singapore's highly regarded banks were in trouble?

The Monetary Authority of Singapore (MAS) was quick to issue a denial. It said Singapore's "big three" local banks - DBS, OCBC and United Overseas Bank - maintain capital levels well above the threshold required under new global banking rules known as Basel III. "Local banks," it concluded, "are not at risk."

Basel III is the third instalment of a voluntary regulatory standard for banks agreed upon by members of the Swiss-based Basel Committee on Banking Supervision. Drawn up in 2010 and 2011, Basel III is scheduled to be introduced globally between this year and 2015.

The idea is to progressively strengthen banking systems worldwide by encouraging banks to increase the amount of funds that they hold in reserve against deposits made by their customers. The requirements have since been adopted by the US Federal Reserve and, at least in principle, by central banks worldwide.

But in revising its outlook for Singapore's banking sector, Moody's was not expressing an opinion about the financial soundness of individual banks.

Indeed, the agency continues to give all three local banks a standalone rating (without factoring in potential support from the Government or related companies) of Aa3. This means that they are among the most financially sound in the world.

The use of slightly different definitions and rating methods means that the assessments of rival rating agencies such as Standard & Poor's and Fitch Ratings are not directly comparable. But their conclusions about the quality of Singapore banks are similar.

Moody's recent decision, however, refers to something quite different.

In its recently released report entitled Singapore Banking System Outlook, the agency was giving its assessment of how the environment in which banks in the country operate will evolve over the next 12 to 18 months.

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