Following the inadequacies in the OCBC response to SMS phishing scams in December 2021, the Monetary Authority of Singapore (MAS) has imposed additional capital requirements on OCBC. OCBC is now required to apply a multiplier of 1.3x to its risk-weighted assets for operational risk, which amounts to approximately S$330 million in capital, according to its most recent financial results.
This regulation comes after reviews conducted by an independent firm hired by OCBC and MAS, revealed weaknesses in the bank’s standard operating procedures, contributing to the magnitude of the scam.
Nevertheless, once all the deficiencies identified in the review are fully addressed, this additional capital requirement will be removed.
In the meantime, you might be wondering if this has any severe implications for OCBC.
What is capital requirement?
Let us first understand what this capital requirement entails. In a nutshell, capital requirements are regulatory rules that ensure banks have enough capital to sustain operating losses. This not only keeps banks solvent in the case of a black swan event, but it also aims to keep the entire financial system safe.
The most commonly used metrics to monitor capital requirements are the Common Equity Tier 1 (“CET1”) capital adequacy ratio, Tier 1 capital adequacy ratio, and Total capital adequacy ratio per Basel III, which establishes global standards on bank capital adequacy.
Consider the CET1 ratio, which is the first line of defense.
Common Equity Tier 1 ratio = Common Equity Tier 1 capital / Risk-weighted assets
The CET1 ratio compares the (liquid) capital of a bank to its assets. This ratio is calculated by dividing the bank’s core capital (retained earnings, common stock, cash, etc.) from the assets lent out (taking into account the credit and market risk of each individual asset)
This ratio would then indicate how well a bank is able to absorb a financial shock in the event of a financial downturn, with a bigger ratio reflecting a stronger bank.
Tier 1 CAR and Total CAR are identical, just that they encompass more illiquid capital.
| Basel III | CET1 CAR | Tier 1 CAR | Total CAR |
| Minimum requirement | 4.5 | 6 | 8 |
| Capital conservation buffer* | 2.5 | 2.5 | 2.5 |
| Minimum requirement plus capital conservation buffer | 7.0 | 8.5 | 10.5 |
*Above the minimum capital adequacy requirement, a capital conservation buffer of 2.5% is established. Banks that fall below this level will face capital distribution restrictions, which will preclude them from paying dividends or even employee bonuses.
In Singapore, we adhere to Basel III, but MAS, which is more conservative, went a step further.
Beyond the respective minimum requirements shown above, MAS has imposed additional measures on our three local banks, which are also known as D-SIBs (Domestic-systemically significant banks), raising the capital adequacy ratio by 2% in each categories.
| MAS | CET1 CAR | Tier 1 CAR | Total CAR |
| Minimum requirement | 6.5 | 8.0 | 10.0 |
| Capital conservation buffer | 2.5 | 2.5 | 2.5 |
| Minimum requirement plus capital conservation buffer | 9.0 | 10.5 | 12.5 |
So, how does this affect OCBC?
Taking a second look at the equation.
Common Equity Tier 1 ratio = Common Equity Tier 1 capital / Risk-weighted assets
Since OCBC is now required to apply a multiplier of 1.3x to its risk-weighted assets for operational risk, this would lower its CET1 ratio and the other 2. In other words, it may need to set aside more capital in order to meet the above-mentioned minimal ratio.
Putting aside more capital would then reduce the firm’s ability to invest and profit from this capital, thus diminishing its profitability.
Fortunately, OCBC has very healthy capital adequacy ratios, with its CET1 ratio in the most recent quarter coming in at 15.2, well above the 9.0 minimum requirement (including capital conservation buffer). In fact, OCBC has the highest CET1 ratio among the three banks.
Even after considering a 0.21 percentage point impact from this additional regulatory capital mentioned by OCBC, the firm’s capital adequacy ratios are still well above the regulatory requirement and hence do not need to set aside more money. So actually, the impact is trivial.
Not the first time
Looking back, similar regulatory actions were enforced on DBS when its digital banking services were affected between November 23 and 25, 2021. At the time, MAS applied a 1.5x multiplier to its risk-weighted assets for operational risk, resulting in an extra S$930 million in regulatory capital.
In the case of DBS, the impact on the group’s capital ratio was 0.4 percentage points.
Summary
Overall, the increased capital requirement imposed by MAS on OCBC has a limited impact on its day-to-day functioning. This episode, however, should serve as a wake-up call to all Singapore banks (not just OCBC) to take financial scams more seriously. If a group of 19 to 22 could concord such a sophisticated scheme, I wonder what a group of motivated experts could do to our financial system.
In the grand scheme of things, I think OCBC lost more from the S$13.7 million it paid out as goodwill to the 790 customers who fell victim to the scam than from this additional capital requirement.
