SINGAPORE (Sept 2): The Monetary Authority of Singapore (MAS) announced on Aug 29 that it will begin accepting applications for new digital bank licences — two digital full bank (DFB) and three digital wholesale bank (DWB) licences.

The new licences will be extended to non-bank players and the controlling shareholder is required to be a Singaporean or Singapore entity. The entry capital is $15 million, and this will increase progressively to $1.5 billion over a five-year period. There are conditions. For example, DFBs will not be able to access the ATM network or cash deposit machines, but will be able to offer cashback services.

The applicants will be assessed on three main criteria. The first criteria is the value proposition of the applicants’ business model that differs from existing banks. They are to incorporate innovative use of technology to serve customer needs and reach underserved market segments. MAS will also consider the ability of the applicant to implement the proposal. If the applicant has been loss-making since inception, as some of the prospective names such as Grab and Razer are, they will still be considered for a DFB. Being loss-making will not disqualify them. (Razer made a net loss of US$47.7 million in 1HFY2019; Grab remains privately held.) However, MAS will see if the applicant has sufficient financial resources, and will study its path to profitability.

Secondly, MAS expects the applicants to be able to manage a prudent and sustainable digital banking business. They need to understand key risks in the banking business and have good risk management and strong compliance. MAS will consider the reputation, track record, financial strength and commitment of the applicant’s shareholders. In addition, they are to comply with regulations introduced by Basel III.

Basel III is a set of international banking regulations developed by the Bank for International Settlements to promote stability in the international financial system following the global financial crisis.

From the onset, a DFB will be subject to the same level of risk-based capital requirement as local banks and qualifying full banks, including a common equity tier 1 ratio of 6.5%, total capital adequacy ratio of 10%, capital conservation buffer of 2.5% and countercyclical capital buffer of 2.5%. Capital buffers are capital that banks have to accumulate in normal times to be used to offset losses during periods of stress, including for cyclical systemic risks. The countercyclical capital buffer requirement requires banks to add capital at times when credit is growing rapidly so that the buffer can be reduced when the financial cycle turns.

The best way for banks to add capital is through retained earnings. For loss-making entities to be granted DFB licences, their shareholders will have to top up capital with additional equity or shareholder funds.

DFBs also have to comply with the liquidity cover ratio framework that applies to full banks. MAS requires a Singapore dollar LCR of 100% and an all-currency LCR of 50%. Full banks have complex business models; hence, their LCRs are the ratio of high-quality liquid assets to net cash outflows per day. DFBs will be allowed to use minimum liquid assets if their business model is simple. LCRs are implemented because the new digital business models are untested. For a small, open economy such as Singapore, financial stability is key.

The final assessment criteria will be based on growth prospects and other contributions to Singapore’s financial centre such as jobs, skills development in the workforce and technological capabilities.

The closing date for applications is Dec 31. Licence awardees will be announced in mid-2020 and they will be given 12 months to meet the requirements. The new DFBs and DWBs should commence business in mid-2021.

This story first appeared in The Edge Singapore (Issue 897, week of Sept 2) which is on sale now. Not a subscriber? Click here