MAS slapping banks with additional capital requirement may hurt borrowers more than lenders

by Daniel Tan

In the last two years, there have been a series of disruptions and outages in essential banking services which MAS has responded by slapping banks with additional capital requirements and supervisory actions.

However, not only are additional capital requirements seemingly not effective, they may hurt consumers and businesses as well, making it a double whammy for them.

Additional Capital Requirement (ACR) is a regulatory requirement imposed on banks by financial authorities to ensure their stability and ability to absorb unexpected losses.

Having to meet it may mean having to raise additional capital, which will increase their costs and, therefore hurt profits.

However, the fact that the local banks are flushed with deposits, with DBS being able to loan MAS S$30 billion just in June this year, would suggest that when MAS slapped DBS with approximately S$1.6 billion in total additional regulatory capital in May, after increasing it from 930 million last year from another disruption – DBS may have no problem and therefore a real penalty in it.

Modern banking relies on fractional banking. If you deposit S$1,000 into a savings account and the bank needs to keep 10% in reserves, your bank will hold onto S$100 and lend out S$900 to another customer. That customer spends S$900 on a product and when the shop deposits the money, the shop’s bank keeps S$90 and lends out S$810, and so on, creating at times, more many times the S$1,000  which will be circulating in the economy, enabling it.

With access to credit, businesses are able to expand and create jobs, which in turn leads to increased economic activity. It also allows people to spread out the cost of large purchases such as property over time, making them more accessible.

As a loan marketplace, we already had a few small non-bank lenders withdrawing from our platform, unwilling to look at new borrowers’ enquiries at the moment, because of their market outlook.

With fewer monies from the banks available for lending, there may also be even less competition, which may result in higher interest rates, hurting consumers and businesses that disruptions may have already inconvenienced.