Lee Hsien Loong: Financial sector - liberalisation and growth
Address by Mr Lee Hsien Loong, Deputy Prime Minister of Singapore and Chairman of the Monetary
Authority of Singapore, at the Association of Banks in Singapore's 31st Annual Dinner, Singapore,
17 June 2004.
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In 1997, MAS launched a comprehensive review of Singapore's financial sector. The Asian crisis
unfolded soon after, but we decided to press on. Over the next few years, we fundamentally changed
our regulatory approach, from one-size-fits-all prescriptive regulation towards a more risk-focussed
supervisory approach. We liberalised the industry, allowing freer competition, more play of market
forces, and greater risk taking by institutions. We actively promoted activities in which we had
competitive advantages.
Our efforts are bearing fruit. In the last seven years, the financial industry has changed dramatically.
Tonight, let me review the state of the industry, and discuss some key challenges and opportunities
going forward.
Overview of changes in the financial sector
Singapore's financial sector held up well against the full impact of the Asian Financial Crisis, and more
recently the SARS outbreak. Despite the turbulent environment, it has steadily grown and matured.
Our financial system is robust, and our legal, supervisory and institutional framework is sound, as the
IMF's recent Financial System Stability Assessment of Singapore affirmed. Today, 700 local and
foreign financial institutions are in Singapore. They offer a comprehensive range of world-class
financial services and with 5% of our workforce, contribute 12% of Singapore's GDP.
In banking, seven local banking groups have consolidated into three stronger groups. Foreign
shareholding limits on locally-incorporated banks have been removed, allowing them to tap the equity
market more flexibly, and if they desire, to form strategic partnerships with foreign banks. Six banks
with regional and international standing and the potential to contribute to our financial sector have
been awarded Qualifying Full Bank (QFB) licences. This has intensified competition in retail banking
and widened consumer choices. Foreign banks also continue to be active players in the wholesale
banking market and in wealth management. International banks are using Singapore as their base to
service corporations and high net worth individuals (HNWIs) in the region.
In insurance, a formerly closed industry has been substantially deregulated. We have enhanced
disclosure requirements of products, tightened up sales practices and raised the overall
professionalism of insurance advisers.
The financial advisory industry has also seen substantial growth. A diversity of firms and business
models now cater to different market segments. Service and conduct standards of financial advisers
have gone up.
The wealth management industry has grown dramatically. Annual growth rates in private banking
assets under management (AUM) average almost 20%. In 2003, institutional AUM grew by 35%
yearon-year to S$ 465 billion. A majority of these assets are internationally sourced. Close to
1,000 investment professionals, comprising portfolio managers, analysts, asset allocators and
economists now work in this high value-added sector. Fund managers have been extending their
value chain of activities here. Apart from portfolio management and marketing activities, companies
now carry out middle-office functions such as regional trading and research. Others have centralised
regional back office operations in Singapore, making full use of our efficient infrastructure, conducive
business environment and stable political climate.
MAS also made a major effort to develop Singapore's capital markets. A cornerstone of this effort was
the easing of restrictions on the lending of the Singapore dollar (S$) to non-residents. Originally, banks
required MAS' permission for any form of lending to non-residents above S$ 5 million. This blanket
restriction effectively discouraged S$ speculation, but it also stifled the growth of capital markets.
Starting in 1998, we progressively refined the restrictions to focus more sharply on lending for the
purpose of S$ speculation. We lifted restrictions on the trading of S$ derivatives like futures, options
and cross-currency swaps. We allowed non-residents to raise S$ funds through debt and equity
issuance. Eventually the policy changed so substantially that it was no longer apt to describe it as the
non-internationalisation of the S$. So in May this year we renamed it the policy on the lending of S$ to
non-resident financial institutions.
Consequently, our capital markets have broadened and deepened. The debt market has matured
significantly, and now provides a cost-effective alternative funding source to a diverse range of local
and foreign borrowers. The SGS yield curve has been extended from 7 to 15 years. Some statutory
boards have even issued bonds up to 20 years in tenor. The corporate debt market has quadrupled
since end-1996 with S$ 103 billion of corporate debt securities outstanding as at end-2003. Debt
issuance has increased substantially from only S$ 5.4 billion at end-1996 to S$ 67 billion in 2003, a
compounded annual growth of 43%.
The profile of debt issuers has also changed. Statutory boards used to dominate, but now form only
3% of total issuance. Instead, the debt market has a stable base of large corporates and financial
institutions issuing bonds well over S$ 1 billion in issue size. This has increased liquidity in the
secondary market. Large international issuers such as IFC, Freddie Mac, Fannie Mae and ADB, which
can tap any market in the world, have chosen to raise funds in Singapore.
Treasury markets have also stayed buoyant, as Singapore remains one of the established leading
global FX trading centres. The creation and hedging of structured products have boosted turnover in
derivative markets. Singapore now ranks 6th globally, in OTC FX and interest rate derivatives.
Reforms were also introduced to deregulate the stockbroking industry. The industry has consolidated,
operating more leanly on much lower commissions. The bigger local players have expanded their
product range and also expanded overseas. More foreign players have entered the market. Overall,
investors have benefited from lower trading costs.
SGX became the first demutualised, integrated stock and derivatives exchange in the Asia-Pacific in
December 1999. It is now well placed to grow its business, and respond to developments in regional
capital markets. More foreign companies are choosing to list in Singapore. To date, there have been
47 listings by Chinese companies, and a few Indian listings are in the pipeline. SGX has also actively
pursued alliances with other exchanges. Its first securities co-trading linkage with the Australia Stock
Exchange allowed investors in the two countries to trade in each other's market directly. SGX is also
exploring linkages with ASEAN securities markets. If this succeeds it will benefit the region as a whole.
We have also grown as a processing centre. Large financial institutions have centralised their regional
and global processing operations in Singapore. These house high value-added, mission-critical
systems as well as back-office processing activities.
In brief, our financial sector has become more dynamic and vibrant. Many persons and institutions
have participated in this process. Their support, hard work and spirit of enterprise made this possible. I
thank them all.
Developments in the banking sector
Let me now focus on the banking sector.
The Asian Financial Crisis underscored the importance of sound, resilient financial systems
underpinned by strong domestic banks. The lessons of the Crisis played a major part in re-shaping the
banking industry. Meanwhile, global trends such as consolidation among the major international
banks, technology advances and globalisation of financial markets continued apace. A new financial
landscape was emerging.
MAS-initiated reforms
Banking was the most critical and complex part of the MAS reforms. We started from a strong position,
with sound and well supervised local banks, although they operated in a tightly regulated and
protected environment. Our challenge was to free up this industry so that it could continue to develop
and grow, without compromising stability and soundness in a changing landscape. Strong and
wellmanaged local banks, with a significant share of the home market, were and are critical to the
resilience and stability of our financial system. However, we could no longer maintain this by restricting
access to the domestic market. We needed to permit more competition, but in phases, to allow the
local banks to adjust and compete effectively.
MAS therefore introduced a five-year programme to liberalise access to Singapore's domestic banking
market. We made the first moves in 1999. As we lightened our regulatory touch, we also worked with
banks to set guidelines for best practices and give banks greater room for enterprise and innovation.
Stronger banking industry
Today, Singapore's banking sector is more open and dynamic. This has come about without
sacrificing strength and stability. Individual banks and the industry as a whole have risen to the
challenge. Existing players have upgraded and strengthened themselves. Banks have maintained high
prudential standards, become more efficient and improved their service quality and product ranges.
The foreign banks have contributed to the vibrancy of the Singapore banking scene. Competition has
led to the development of a rich array of innovative products and more discriminating pricing models.
Customer service as a whole has improved. Foreign banks have continued to expand their operations
here, and many have made Singapore a regional or even global platform for important banking
services.
The local banks have strengthened their capabilities and expanded their range of business activities.
They have built up their management teams, and made significant infrastructural investments to
enhance their operational effectiveness. Fees and commissions have risen as a proportion of
operating income. Banks are offering new business services, while continuing to provide affordable
banking facilities to the average Singaporean. They have held their own despite the increased
competition. For instance, their market share of resident non-bank deposits (both ACU and DBU) has
declined only marginally from 62% to 59% over the last five years.
The local banks have also improved their business and risk management capabilities. The recent
change in MAS' capital adequacy requirements is in recognition of local banks' efforts to upgrade their
risk management capabilities, and should allow them to manage their capital more flexibly.
With greater financial strength from the mergers and increased competition at home, local banks have
begun to venture abroad and develop a regional footprint through overseas acquisitions.
Banking liberalisation
When MAS embarked on the liberalisation measures, we sought to anticipate changes and trends that
we were convinced were already underway. Events since then showed that we moved none too soon.
Technological advances have continued unabated. The Internet for instance has proven to be an
efficient and widely used alternative distribution and marketing channel, and has helped create new
business models. Worldwide, major banks continue to consolidate, though the process is not yet
complete, especially in Europe.
We also anticipated needing to open up our banking sector because we intended to negotiate FTAs
with major trading partners. Since our goods sector was already almost completely open, our partners
would surely make requests in services, and especially financial services. Therefore our local banks
had to be ready. The banks would have preferred that we slow down the pace, but we had an
overriding need to conclude a wide network of FTAs, including one with the US. The banking reforms
enabled us to do this. Now that we have done so, we are reassured that our banks are holding their
own, and can take the increased competition in their stride.
Adjustments to liberalisation measures
It is now three years since the last package of banking liberalisation measures in 2001. Having
assessed the state of the industry, MAS has decided to take a few further steps to liberalise the
banking industry. These are incremental adjustments to the earlier major liberalisation packages:
a. Firstly, from 1 January 2005, QFBs will be permitted to establish up to 25 service locations
from the existing 15. The 25 locations can either be brick-and-mortar branches or offsite
ATM locations. With 6 QFBs permitted to share ATMs amongst themselves, this could result
in a QFB shared ATM network of about 150 locations across Singapore. This provides QFBs
with significant scope for expanding their presence in the domestic market.
b. Secondly, MAS is prepared to grant a limited number of new Wholesale Bank (WB) licences
to applicants that meet our admission requirements.
c. Finally, QFBs will with immediate effect be allowed to negotiate with the local banks on a
commercial basis to let their credit card holders obtain cash advances through the local
banks' ATM networks.
Singapore now has one of the most liberal banking environments in Asia. However, over time, as the
industry changes, we must be ready to liberalise further. MAS will reassess the environment before
deciding on any further measures.
While it is still too early to make a final judgment, banking liberalisation has so far achieved its aim of
bringing about greater competition. It has fostered the consolidation of the local banks, which might
otherwise have taken much longer. The overall market shares of local and foreign banks have not
changed drastically, but there has been an all-round qualitative improvement which has enhanced the
vibrancy of Singapore's financial sector.
The liberalisation measures and reforms of the last few years have set the financial sector on a firm
foundation. However, we cannot afford to rest on our laurels. Challenges as well as opportunities exist
for both the banking industry and the financial sector as a whole. We must identify and respond to
them, in order to keep the financial sector dynamic and competitive.
Challenges for banks
For banks, I will focus on two main challenges. Firstly, banks need to continue to maintain high
prudential standards so as to remain sound institutions. Next, they have to develop new strategies to
continue growing strong, viable businesses.
Sound institutions
MAS does not seek to prevent institutions from taking risks. It is the business of financial institutions to
take on and intermediate risks. But if risks are not well managed or events turn out unfavourably,
institutions can incur substantial losses. No amount of regulation or supervision can completely
prevent losses. On the other hand, over-regulation would curb innovation and enterprise. This was a
key message in MAS' Monograph on the Objectives and Principles of Financial Supervision in
Singapore.
Financial institutions therefore need to build their capacity to identify, monitor, and control the risks that
they take. Banks should benchmark their risk management against international best practices. Risk
management should be an integral part of their operations, and should keep pace with their business
profile and with industry developments. The banking sector as a whole has done well in this respect,
and we expect to see this continue.
One major change in the way banks manage risks will be triggered by the new Basel Accord.
Implementing Basle II will be a complex exercise but will spur banks to enhance their risk
management practices. Banks need to develop robust systems and processes to make the new
capital adequacy rules work. While cost will inevitably be an important consideration, this should be
weighed against the significant benefits and operational savings from the more accurate allocation of
capital to risk. MAS will work closely with the local banks to implement the new Accord.
Business and strategic considerations
Next, banks have to decide how to grow and position their businesses over the longer term, especially
the local banks. Maintaining margins and cutting costs is necessary in the short term, but beyond that,
banks need longer term strategies for staying viable and competitive.
After a period of domestic consolidation, the local banks have made several regional acquisitions, but
they still remain small by international standards. Competition will intensify, within the domestic market
because of liberalisation, and internationally because globalisation is continuing. The local banks may
well find that in order to hold their own and be viable, they need to grow bigger.
Possibilities for domestic growth are limited other than through further consolidation. But the region
offers considerable opportunities. Asia is poised for sustained growth, having emerged from the Crisis
as one of the most promising regions in the world. Countries have gone through a period of structural
reforms and transformed their financial sectors. Now they are progressively opening up their
economies to greater foreign participation. This is attracting interest from major regional and global
players.
Our local banks cannot ignore this game. They need to consider their options carefully. Is the way
forward to remain a niche player, sizeable in the domestic market, but small by international
standards? Or must they achieve greater scale by expanding into the region? If so, what strategy will
minimise the risks and maximise the benefits of operating in different countries? How can they build
strong management teams, to execute a sound strategy well? Each bank must answer these
questions for itself. Their long term profitability and viability depends on their finding the right answers.
Challenges for the financial sector
Let me move on to some of the opportunities and challenges for the financial sector. I will discuss
three issues - developing the wealth management industry, growing our capital markets, and
increasing our human capital.
Wealth management
The Asia-Pacific is the fastest growing market for private banking in the world. Rapid development is
producing large numbers of wealthy individuals, and huge amounts of private wealth to be managed.
Asian savers and investors are increasingly sophisticated and are seeking best of breed products and
managers. Non-Asian clients are increasingly demanding geographical diversification for their assets.
Institutional assets in Asia will also grow progressively as countries reform pensions, and deregulation
frees up assets from insurance companies and other corporates for professional management.
These factors favour Singapore as an Asian centre, because of our sound economic and political
environment, conducive legal and tax policies, reputation for integrity, and strict enforcement against
crime and money laundering. Singapore is already an established centre for managing Asian
investments of global clients, and global investments of Asian clients. The strong growth potential of
wealth management makes it an industry where Singapore is well placed to become a global player.
The large increase in the number of HNWIs globally has also boosted demand for estate and trust
planning. We are reviewing and modernizing the Singapore Trustees Act. MAS is also reviewing the
Trust Companies Act, and will take over the regulation of trust companies. These steps will enhance
Singapore's position as an international trust domicile and widen the suite of wealth management
services available here. We also need to build a larger pool of wealth management skills, and continue
to increase the range of product offerings for wealth management clients.
Capital markets
Since the Crisis, countries in Asia have recognized the importance of developing their bond markets.
While individual countries have made significant progress, their markets remain fragmented and small
by international standards. We need closer co-operation among the capital markets in Asia, in order to
integrate the markets and collectively increase their depth and liquidity. This will allow us to effectively
recycle some of Asia's huge reserves and attract more international investors to the region.
Regional governments have therefore taken several initiatives to foster a regional capital market,
covering both fixed income and equity. These address both supply and demand side issues, such as
easing constraints to cross border activity, forging alliances and linkages among the exchanges, as
well as establishing a regional infrastructure. Challenges still remain. For example, we have to work
out and implement efficient solutions across countries that have different start points, practices and
regulatory frameworks. But it is encouraging that governments are more seized with this problem, and
more ready to collaborate with one another, than ever before.
Singapore has taken the lead in several of the regional initiatives. Financial institutions here should
also take part actively. This is the time to engage regulators and government officials in the region, to
enter their growing markets and position yourselves for the business opportunities that the initiatives
create.
As a leading foreign exchange centre with a critical mass of global fixed income and equities
expertise, Singapore can service international investors operating in Asia. Our market is well placed to
facilitate the hedging activities that are essential for risk management and improving market efficiency.
These will complement the domestic markets in the countries of the region. Our strong legal system
and the availability of international legal expertise and product structuring teams equip us to structure
complex cross-border transactions. The growing wealth management industry will also generate a
steady source of funds for regional investment products.
Human capital
A major issue that concerns all parts of the financial sector is human capital. A distinguishing
characteristic of a successful financial centre is that it attracts talented and dynamic professionals from
a broad range of disciplines and experiences. They make the financial centre what it is. Deepening
and broadening our talent pool will be a continuing challenge for the financial sector and for MAS.
MAS and industry players have taken steps together to address this. The Institute of Banking and
Finance had been re-organised to better meet the needs of the industry as a financial training
intermediary. It will also serve as a platform for the industry to provide regular feedback on manpower
needs and issues.
The industry has established the Financial Industry Competency Standards Committee, which will
develop internationally aligned competency benchmarks for the whole financial industry. MAS is also
working with specific industries to address their human resource needs through a manpower
conversion scheme. This scheme will help mobilize, train and channel resources to support growth
areas quickly.
MAS will work with financial institutions to build and upgrade talent in the financial sector workforce.
Singapore has always welcomed talented individuals to live and work here. They have contributed
much to the vibrancy of our financial sector. Singapore must remain open to talent and continue to be
a conducive environment to work and live in, so that we can continue to attract talent here, and also
retain able Singaporeans.
Conclusion
MAS is committed to the vision of Singapore as a leading global financial sector, one which is
competitive, fosters enterprise and innovation, and maintains high regulatory standards. We have
made steady progress toward this goal and must continue to do so. We must never become
complacent and satisfied with the status quo, or else we will soon be overtaken and left behind.
MAS will strive to create an environment where market forces, enterprise and innovation can thrive.
We will stay abreast of market developments, and be sensitive to the needs of the industry, without
compromising on supervisory standards. Our experience has shown that the two are not incompatible;
indeed listening to industry players, without being overwhelmed by them, helps us to become better
regulators and supervisors.
I am grateful for the full support and cooperation which the industry has extended to MAS, and to me
personally, over the years. I am also grateful to the staff of MAS, whose professionalism, dedication
and hard work have enabled us to reorientate our approach and transform the financial sector
smoothly and safely. MAS and the industry will need to continue to work together to realise the vision
of a more dynamic, competitive and vibrant financial sector in Singapore. That is the ultimate test of
the success of our efforts to grow the sector, and make Singapore a key financial hub in Asia.