New capital The second opportunity is in new capital. New or alternative capital continues to increase its share in the global reinsurance industry, as alternative risk transfer solutions in the form of insurance-linked securities (ILS) such as catastrophe bonds, collateralised reinsurance and sidecars, among others, gain acceptance. Alternative capital grew 6% in the first half of 2015 to $ billion, while traditional capacity fell by 3% to $ billion. While the influx of alternative capital may have led to excess capacity, softening rates and narrowing of profit margins, this same capital has the potential to unlock opportunities for insurers to access new products and markets. As I mentioned earlier, Asia, in particular, is especially attractive to insurers and reinsurers:  BIS central bankers’ speeches  3  •  Alternative capital, when deployed to markets in need of risk capital for protection against losses, will allow insurers and reinsurers to underwrite more risks and better serve society’s needs. •  As countries in Asia look to strengthen resilience to potentially debilitating events like catastrophes, it is not unexpected that alternative risk transfer mechanisms, such as catastrophe bonds and government pools, will increasingly feature as regional insurers leverage alternative sources of risk capital to complement traditional reinsurance. The management of catastrophe risks in Asia-Pacific is a priority for insurance players as well as governments in the region. A research by Lloyd’s has shown that a 1% rise in insurance penetration translates to a 22% reduction in taxpayers’ contribution following a disaster.

Notably, the Basel Committee’s assessment of the long-term economic impact of Basel III was that the economic costs of going above Basel minimums were still lower than the costs arising from banking crises. In deciding on the levels appropriate for Singapore, MAS carefully weighed the costs of additional capital against the benefits. Banks that are well-capitalised, prudently regulated, and located in stable financial centres such as Singapore, present an attractive value proposition to depositors and investors. Holding systemicallyimportant banks to a higher solvency standard reduces both the likelihood of failure and impact to the real economy if one of them runs into difficulties. (iii)  Third, the impact on banks’ capital structures will be manageable. This is, in part, due to the already high internal capital buffers held by the banks and also due to the transition arrangements that will apply. In short, the locally-incorporated banks are in a good position to meet the higher capital adequacy requirements and will emerge stronger in a post-Basel III world. Institutional structure of banking One strand of the regulatory debate that is still ongoing relates to whether reforms to how banks structure themselves can help promote financial stability. There are several dimensions to this. I will focus on the dimension that is most relevant to Singapore as a financial centre. This relates to the merits of the universal branching model compared to a subsidiary model for retail banking. Most foreign banks in Singapore operate under a universal branching model.