Revising Local Banks' Risk-based Capital Adequacy Requirements to Reflect Climate Risks

Mr Don Wee asked the Prime Minister following the European Banking Authority's latest requirement for banks to incorporate environmental risks into calculations of their core capital, whether MAS will consider revising the risk-based capital adequacy requirements for local banks to reflect such climate risks in their credit decisions.

The Monetary Authority of Singapore (MAS)'s banking capital rules are in line with internationally-agreed standards issued by the Basel Committee on Banking Supervision (BCBS). These rules already provide banks the flexibility to incorporate climate risk considerations when determining the regulatory capital that they are required to maintain. This was also clarified by BCBS last year. For example, a bank should consider a borrower’s exposure to climate risks in its credit risk assessment. This would impact the capital that the bank is required to hold for a loan to the borrower under our risk-based capital rules.

The enhancements proposed by the European Banking Authority (EBA) to its capital framework largely reflect these clarifications. Aside from this, EBA has pointed to the importance of international coordination via BCBS for any fundamental revisions to the banking capital framework. This is MAS’ view as well.

Beyond capital requirements, MAS has issued guidance in 2020, setting out our supervisory expectations for banks to have sound governance and risk management frameworks to manage environmental risks. MAS is also currently consulting on proposed Guidelines on Transition Planning by banks to enable the global transition to a net-zero economy. MAS is the first amongst global supervisors to do so. A key proposal is for banks to engage their customers on the environmental risks they face and work closely with them to implement effective measures to build resilience to climate change.

MAS will continually review its regulatory and supervisory approach to keep pace with global best practices in this area. This includes working closely with other regulators to foster alignment and consistency in international standards.