Tharman Shanmugaratnam: Ensuring strong anchors in our banking
system
Speech by DPM Tharman Shanmugaratnam, Chairman of the Monetary Authority of
Singapore, at the 39th Association of Banks in Singapore (ABS) Annual Dinner, Singapore,
28 June 2012.
* * *
Mr. Piyush Gupta, Chairman of the ABS,
Council Members,
Ladies and Gentlemen,
I am happy to be here this evening to join you at the 39th ABS Annual Dinner.
The continuing lessons from the crisis
Four years after Lehman Brothers collapsed, the global financial crisis is still with us. Its new
epicenter, as we all know, is in Europe. The combination of weak banking systems and
overstretched government balance sheets in several European economies has proved toxic.
It has led to a loss of confidence and unsustainably high borrowing costs, not just for Greece
but for a few other larger Eurozone economies. It has also resulted in the virtual
disappearance of the unsecured interbank market, which is the lifeblood of any financial
system.
Each major crisis yields lessons for all countries, and there will be many lessons arising from
the crisis in Europe. In several European economies, as in the US, entitlement spending by
government has outrun future revenues, and it is no longer possible to borrow away the
problem.
But there are major lessons too in banking, and the main ones are in fact the old lessons.
Spain, the current focus of attention in the markets, is a case in point. Its government
finances were in fact in better shape than in many other advanced countries. But troubles
had been accumulating in its banking system, caused especially by small and medium sized
banks having made excessive loans to a property sector that has now crashed - a familiar
problem repeated almost in cycles, across a range of countries. The result is a cutback in
credit, a deeper recession, greater strain on government finances both as revenues decline
and the government is forced to bail out banks, and worsening bank balance sheets as
banking assets lose further value and borrowing costs increase. We are therefore seeing a
vicious cycle of economic decline and a loss of confidence.
The situation is not unique to Spain. The specifics of the balance sheet problems vary from
country to country, but a self-reinforcing cycle of feedbacks between falling economic activity
and weak bank and sovereign balance sheets is now taking place in several countries in
Europe. It is complicated by an increasing fragmentation in politics, which makes the journey
to a credible and lasting solution in the Eurozone all the more complex and challenging in the
years to come.
The problems in the Eurozone and the US underline the absolute necessity for consistently
sound banking practices and governance by banks. The crisis also provides lessons for
regulators and the supervision of banks. The IMF has found that regulatory intervention in
Spain lacked timeliness and effectiveness, even though the problems in banking had been
identified early on. Regulators must be prepared to take early and decisive corrective actions
to forestall a build-up of risks in individual banks and the banking system as a whole.
Further, contagion amongst banks is a fact of life. Financial systems can be severely
stressed by their weakest points, even if it involves a single bank or a group of small banks.
The Northern Rock episode in the UK was an example in the earlier phase of this crisis. The
Spanish cajas or regional savings banks are now another. The largest Spanish banks are
widely acknowledged to be well capitalised, to have lower exposure to the property sector
and to have well diversified earnings internationally. But until the troubles in the cajas are
resolved, even sound Spanish banks are being penalised by higher funding costs, and
citizens and tax payers too are exposed. Confidence is therefore about banking systems, not
just about individual banks. This is all the more why regulators have to be vigilant in spotting
weaknesses and requiring corrective actions, both across a system and in individual banks.
The weakest point matters.
International regulatory reforms
The global financial crisis has prompted a major review of international regulatory standards.
We have achieved much, with the new rules developed through the Basel Committee on
Banking Supervision and the Financial Stability Board - new rules on the quantity and quality
of capital and liquidity and the ongoing work to strengthen cross-border supervision and
resolution frameworks for global banks.
The Basel Committee has proposed several reforms to minimise the risk of failure of global
systemically important banks ("G-SIBs"), and to minimise the impact if any of them should
fail. It is also recognised that some banks are systemically important within their own
domestic markets even if they are not internationally active to the same extent as the
G-SIBs. The failure of these domestic systemically important banks ("D-SIBs") can have a
major impact on an economy, and indeed unpredictable consequences for a broader region.
Bankia for example, is not a G-SIB. The Basel Committee has recommended higher loss
absorbency requirements for G-SIBs, and is studying an appropriate regulatory framework
for D-SIBs. MAS is very much part of that discussion.
However, in order to keep to the spirit and intent of the new measures, sensible judgement
will be the key to implementing the new rules. Sensible implementation requires national
regulators to take into account the impact of their actions on economic growth and
international finance even as they exercise national discretion to address prudential issues in
their banking system. There are two risks of a broader nature that we have to keep clearly in
focus in international discussions, so that what we do now to strengthen our respective
national systems does not lead to new problems and vulnerabilities internationally, further
down the road.
First, we have to ensure that the cumulation of enhanced capital and other requirements on
global banks do not impede them from playing their critical roles in global finance. The global
banks play a major role as providers of liquidity in home, host and international markets.
Even in emerging markets, debt and equity market liquidity often relies on active participation
by global banks. Enhanced regulatory requirements should therefore be targeted, risk
appropriate, and applied in a non-discriminatory way on banks posing the same level of risk,
be they domestic or global banks.
The safety buffers for global banks, which clearly needs to be enhanced, cannot therefore
rest too heavily on premiums in up-front capital, liquidity and other regulatory requirements.
We should strengthen supervision and crisis resolution capabilities to complement and avoid
an over-reliance on regulation. Strengthen continuous supervision rather than rely
excessively on upfront regulatory requirements. Effective international coordination among
supervisors requires more open and transparent sharing of information between home and
host supervisors - home supervisors will want to be well informed about the requirements
imposed on significant overseas subsidiaries, and host supervisors need to be kept apprised
of developments at the parent bank. Cross-border supervisory colleges and crisis
management groups are therefore critical, and they have to be strengthened to ensure that
national policy measures are globally consistent and mutually supportive. So that is the first
risk, of going too far with respect to global banks such that the global financial system is
impaired.
The second risk is that of the fragmenting or balkanising finance. We are already seeing
signs of this, and most especially in the wake of the European crisis. Deleveraging by some
international banks is leading to a pull-back into home markets. But some regulatory
responses, not just market responses, may reinforce this pull-back, by restricting the flow of
capital and liquidity outside home markets. Not only will this ring-fencing of national systems
weaken international banking and trade, it may introduce new risks to financial stability when
global banks are not able to deploy liquidity from one part of the banking group to other parts
in need. Better international co-ordination in the implementation of rules is therefore needed
to ensure that they serve their intended national objectives without weakening the global
system as a whole and introducing new vulnerabilities.
A sound financial system anchored by a core of strong local banks
Just as we derive lessons from troubled banking systems, it is worth looking too at those that
have not run into problems. It is notable that among the jurisdictions with systemically
important financial centres, Canada, Australia, Hong Kong, and Singapore have held up well
during the global financial crisis. A little remarkably, the top ten banks in Bloomberg's latest
annual ranking of the world's strongest banks included four Canadian banks, the three
Singapore local banks and two Hong Kong banks. There is no room for complacency - the
financial crisis has shown how volatile financial markets can be and the speed with which
contagion can spread. Banks have to be constantly vigilant against the build up of risks and
maintain strong buffers against contingencies.
But let's look at these four banking systems for a moment, - Canada, Australia, Hong Kong
and Singapore. They share two characteristics in common.
(i) They are anchored by a handful of banks with a significant share of the domestic market.
(ii) These "anchor" banks are closely supervised and regulated.
Several economies, including some in emerging countries, which had completely opened up
their banking systems and left themselves without local anchors, have now found themselves
to be vulnerable. Banking systems need strong anchor players, who are well regulated and
diligently supervised, and are able to take the long-view, enabling their interests to be closely
aligned with that of the economy. In a crisis too, strong anchor banks may be needed to
acquire distressed financial institutions whose failure could otherwise have a systemic
impact.
But having anchors with a substantial share of the domestic market is not sufficient to ensure
resilience. Without adequate competition, they will earn what the economists call oligopolistic
rent, rather than serve the needs of an economy by innovating and introducing efficient
services. Anchor banks have to be competitive.
This is why we have progressively opened up Singapore's domestic banking sector since
1999. We have allowed greater competition, particularly in wholesale banking where local
players are not protected, and increasingly in retail banking too. It has involved some risks.
We took a risk. But the result is now widely acknowledged to be stronger and more dynamic
local banks, with much improved systems of management, risk controls, technology and
expertise. Banking liberalisation provided the spur for our local banks to raise their game and
compete with some of the world's largest banks while maintaining high prudential standards
and they have done well.
We had previously announced the Government's policy of maintaining the local banks'
market share at no less than 50% of total resident deposits. This remains our position. We
are committed to having strong local banks at the core of the banking system. In a very real
way, our three strong local banks also give Singapore the confidence to continue opening up
the banking sector to foreign competition.
Encouraging foreign banks to deepen their Singapore roots
A diverse international presence and global connectivity must remain key strengths of
Singapore's financial centre. We host many international banks, who conduct an increasing
share of their activities out of their Singapore offices. Some banks have moved their global
heads of business to Singapore, or hubbed specific business lines or IT operations in
Singapore. Consumers and corporate customers have benefited from the wider range of
products and services, offered at competitive rates.
The majority of foreign banks in Singapore operate as branches, taking advantage of the
cost efficiencies arising from branching within an international bank. We continue to support
the use of branches for the vast majority of banks in Singapore, which are in the wholesale
and investment banking businesses.
Additional measures may be appropriate for retail banks that are important to the domestic
market. At the individual depositor level, additional safeguards such as a deposit insurance
scheme (which we already have in place in Singapore) and local incorporation will provide
better protection for depositors from problems emanating from other parts of the banking
group.
Local incorporation can also bring benefits to a bank, especially where it has a significant
retail presence. Liquidity rules under Basel III will require long-term stable sources of funding
to comprise a larger share of a bank's total funding. Competition for deposits is expected to
intensify, and banks that can attract stable funding will gain an advantage. Local
incorporation can therefore demonstrate a bank's long-term commitment to depositors and
other stakeholders in a world of possibly permanent heightened volatility and uncertainty.
Beyond local incorporation, encouraging strong international banks to sink deeper roots in a
domestic economy will allow them to play a greater role in contributing to financial resilience.
Let me elaborate on this important objective of encouraging strong international banks to sink
deeper roots in a national economy.
One of the key features of our banking liberalisation has been the Qualifying Full Bank
("QFB") privileges that have been granted to foreign banks. The number of QFBs has
increased from the initial four in 1999 to six in 2001 and eight today. QFBs have also been
allowed more places of business from 10 in 1999 to 25 today.
MAS will continue to liberalise the domestic banking sector in a progressive and calibrated
manner. We will allow greater foreign bank participation in Singapore's domestic financial
system in a way that strengthens financial stability and that encourages foreign banks to
deepen their roots in Singapore. MAS will make several refinements to the QFB programme:
(i) We will require existing QFBs that are important to the domestic market to locally
incorporate their retail operations. The key objective for requiring local incorporation is to
strengthen depositor protection. One indicator of importance to the domestic market will be
the share of domestic deposits. MAS is also evaluating other factors that may be relevant to
individual QFBs and will consult them on the criteria for requiring local incorporation. Not
every QFB needs to be locally incorporated.
(ii) A very small number of QFBs may become significantly rooted in Singapore over time.
For these significantly rooted QFBs, MAS will consider granting an additional 25 places of
business, of which up to 10 may be branches, as part of an overall package negotiated with
the home countries of these QFBs which are free trade agreement ("FTA") partners with
Singapore. This will bring the total to 50 places of business for such QFBs. Being
significantly rooted entails both additional privileges as well as responsibilities to contribute to
the stability of the Singapore financial system.
A significantly rooted bank will be determined by both qualitative and quantitative attributes.
For example, whether -
(a) the bank is locally incorporated with majority Singaporean/PR Board representation, and
what types of businesses are conducted by the locally incorporated entity;
(b) Singapore is one of the major markets for the bank group, constituting a substantial part
of group profits and assets;
(c) major business lines and key decision makers are headquartered in Singapore; and
(d) the bank serves a comprehensive spectrum of the local community in Singapore.
A bank that demonstrates these and other characteristics can be considered significantly
rooted.
(iii) MAS will consider awarding new QFBs only under FTAs where there are substantial
benefits to Singapore. New QFBs that are granted under future FTA offers will have to first
locally incorporate before they may establish up to 25 places of business.
This evolution of our QFB scheme, and it is an evolution, should ensure that our local banks
continue to have majority share of domestic deposits, while banks awarded QFB privileges
can build a deeper presence. Given the size and maturity of Singapore's domestic retail
banking market, we have to calibrate our moves to ensure that greater foreign bank
participation does not result in a fragmented and inefficient market, but instead leads to a
more robust and competitive system. Banks with a meaningful market share will be in a
better position to reap the benefits of scale from a more extensive network, to respond to
customers' changing needs and at reasonable cost, and to be better rooted in Singapore to
contribute to our financial stability and growth.
Taken together, this latest phase in our banking liberalisation and the refinements we are
making in regulation and supervision together with our international counterparts, will ensure
that Singapore remains both a vibrant global financial centre and one of the rocks of stability
in global finance.
Thank you.