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The Basel butterfly flaps its wings

They say that when a butterfly flaps its wings, it has the potential to create a hurricane elsewhere. Known as the butterfly effect, this idea theorises how a small change in a complex system can have large effects elsewhere. There is perhaps no better illustration of this than the potential impacts that the recent regulatory evolutions may have on the financial services industry going forward.

Over the past several months, a number of developments in the Basel framework have been observed both globally and locally in Singapore. On a global level, the Basel Committee on Banking Supervision (BCBS) is exploring further revisions to its supervisory framework while, closer to home, the Monetary Authority of Singapore (MAS) finalised the local framework for the Liquidity Coverage Ratio (LCR) in December 2014 and issued its consultation paper, “Proposed amendments to MAS Notice 1111 on risk based capital adequacy requirements for merchant banks”, in October 20141.

As the changes cascade down from the global, regional and even local authorities, the industry finds itself in a constant state of flux, with the slightest change in regulation having the potential to cause a drastic overhaul of current business processes. In this context of perpetual regulatory motion, it has become increasingly challenging – and yet imperative – for the financial services industry to gain a proper understanding of the latest developments and their subsequent repercussions on the broader regulatory landscape.

This point of view aims to provide a clear and comprehensive overview of the main evolutions in the
Basel framework on both the global and local scales. It will then review the potential implications
for both the financial services industry and the business models that operate in them. Finally, it will
highlight additional regulatory dimensions and trends that will play an important role in shaping the
financial services industry moving forward.

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