Banks have entered into arrangements with third party service providers or other entities within banking group to perform certain operations or process transactions. These include information systems hosting, applications processing and other middle and back office operations. These outsourcing arrangements can bring cost reductions and productivity benefits. However, they may also expose the bank to reputational, compliance and operational risks. For instance, the service provider might fail to deliver the contracted service, experience security breaches, or fall short of the legal and regulatory standards that the bank is required to comply with for these operations. 22. MAS issued a set of Outsourcing Guidelines in 2004 to promote sound risk management practices among financial institutions for their outsourcing arrangements. The key guiding principle is that MAS expects banks to manage outsourcing arrangements as if the services continue to be conducted in-house. 23. MAS has consulted the industry on the revision of the guidelines. Let me highlight some of the key changes. •  First, the Guidelines will set out MAS’ expectations on the use of cloud computing services by FIs. MAS recognises cloud services can offer various benefits such as scalability and advanced functionalities, and is amenable to banks leveraging on cloud services to fulfil their business and operational needs. MAS expects banks to ensure that their risk management measures are commensurate with the nature, scope and complexity of the cloud deployment models that they adopt. •  Second, there will be a greater emphasis on safeguarding customer information.

Singapore banking system resilient under stress scenarios 8. As part of its financial stability mandate, MAS conducts an annual industry-wide stress test (IWST) of key financial institutions (FIs) in Singapore. When MAS first started the IWST in 2002, it was on a much smaller scale involving less than a handful of banks and a few test parameters. Today, the IWST exercise involves around 80 financial institutions across the banking, insurance and capital market sectors. 9. The stress test involves a severe adverse scenario incorporating significant weakening of the external economic environment spilling over to Singapore. The stress scenario includes •  the US, Eurozone, Japan and several emerging Asia economies slipping into recession and China’s economic growth falling below 3%;  •  sharp depreciation in regional currencies and halving of commodity prices;  •  severe and protracted recession in Singapore with unemployment spiking to historical highs and a large correction in the property market. 10. Overall, the results indicate that our banking system remains resilient under such a stress scenario. Non-performing loans would increase but still remain below the peaks seen during the Asian Financial Crisis. Under the prescribed stress scenario, the banks also continue to meet Basel regulatory requirements comfortably and would still have sufficient capital and liquidity to cover potential loan losses and cash outflows. •  The local banks and foreign bank subsidiaries have strong capital buffers, with their total capital adequacy ratios north of 15%, versus MAS’ regulatory requirement of 10%.