Heng Swee Keat: International reform agenda - Singapore's challenges
Opening keynote address by Mr Heng Swee Keat, Managing Director of the Monetary
Authority of Singapore (MAS), at the Asian Banker Summit, Singapore, 19 April 2010.
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Introduction
1. Good morning. It gives me great pleasure to join you today at this 11th Asian Banker
Summit.
2. The inaugural Asian Banker Summit was held in Singapore about 10 years ago. At
that time, Asia was staging a strong recovery from the financial crisis which shook the region
in 1997. Today, we find ourselves at a similar inflection point.
Emerging from the crisis
3. The worst of the global financial crisis appears to be over. Global financial
conditions have since improved markedly and prospects for the world economy have
brightened. Asia ex-Japan is leading the recovery, with its GDP already surpassing the
precrisis level by nearly 8%. For the whole of 2010, the region is expected to grow by 8% over
the previous year. The Singapore economy has rebounded strongly and is expected to grow
by 7-9% this year.
4. While the immediate outlook is positive, we need to remain vigilant. The structural
headwinds to growth in advanced economies remain. The transition from government-led
stimulus to sustained private-sector driven growth may be more difficult in those economies
which face rising sovereign debt levels. As global liquidity conditions are normalised
- following the unprecedented easing of interest rates by major central banks - financial
markets could experience bouts of volatility as a range of asset classes are repriced and this
could impact negatively on various interest-sensitive industries.
5. In addition, the reform of the global financial system has to be carefully thought
through, calibrated and sequenced. It is important that regulatory reforms do not become
politicised, with a rush to adopt simple rules that seem to solve the problems. Specific
measures, each of which is sensible, may collectively create unintended outcomes and
stymie the nascent economic recovery. In this regard, the Basel Committee's Quantitative
Impact Studies will provide an important basis for us to take a more holistic view of the
required changes.
6. So far, most of the discussions have been framed around the theme of "how do we
prevent a similar crisis from happening again." Clearly, we must look back and learn from the
crisis. But we must not fight the last war. We must also look forward. In the years ahead,
significant restructuring of the global economy is necessary. Hence, I believe a more
fundamental question to frame the discussion is: "Given the economic changes and
challenges ahead, how do we make the global financial system more resilient and at the
same time supports economic restructuring and sustainable global growth?"
7. It is therefore critical to get the nexus between the financial system and the real
economy right. In this regard, Asia's needs are likely to be different from those in the
advanced economies. Economies in rapid transition need responsive banking and capital
markets. Bankers need to appreciate the changing needs of the economy, build new
capabilities and develop new products and services, to support the needs of companies,
large and small, in both mature and new industries. The financial industry needs to build up
capabilities to understand the requirements of new industries in the technology and services
arena, and to efficiently fund long term infrastructure needs. To sustain Asia's growth
trajectory, we need to further develop and deepen national financial systems and regional
financial integration. MAS is studying several ideas in these areas, and we look forward to
working with our counterparts in the region and with the industry to advance this.
8. Let me now share the measures that MAS is taking to respond to the challenges
from the international reform agenda and the evolving new financial landscape. Our
measures are based on three key pillars.
Sensible rules
9. The first pillar is establishing sensible rules. MAS seeks to establish sound rules of a
high standard that allows well-managed risk taking and innovation, and which emphasises
the stable and sustainable development of the financial services sector. The effectiveness of
a regulatory framework is not determined by whether it is stringent enough to prevent any
kind of shortcoming or failure of any firm. Neither is it determined by how dynamic and
innovative the financial services sector is. A regulatory framework focused on stringency
alone would impose undue costs and constrain innovation without the assurance that it
would be effective. A regulatory framework focused on dynamism alone may not offer
sufficient protection to investors, depositors and customers, and may experience more
disruptive consequences in a crisis.
10. MAS' approach to rule-making is outcome-focused. This recognises that the design
of regulation should take into account market realities so that unnecessary disruption to
wellfunctioning markets is minimised. For example, in current proposals for a new liquidity
framework for banks, having too narrow a definition of acceptable liquid assets is likely to
adversely affect the operations of banks in countries without an active sovereign debt
issuance programme. We believe that there is a good case for high quality, widely circulated
non-sovereign debt to be included as acceptable liquid assets, without undermining the
prudential intent of the new liquidity rules. In this regard, the results of the Quantitative
Impact Study conducted by the Basel Committee will have to be studied carefully in finalising
the list of eligible liquid assets.
11. Having outcome-focused rule-making also means that where appropriate, MAS may
seek to reign in potential risk-spots through more prescriptive rules, even if such rules are not
commonly accepted international best practices. A good example would be the
macroprudential rules in some Asian countries, including Singapore, to cap loan-to-value ratios for
mortgages, which are not common in the US and Europe. In Singapore, we have also
disallowed innovative financing schemes for mortgages. Drawing such "bright lines" in
regulation - simple, clear "out-of-bound" markers - has been very useful in targeting
excessive build-up of risks in certain situations.
12. Our approach to rule-making has to strike the right balance of having a financial
system that is both sound and progressive, so that it can fulfill its function as a conduit of
capital and a facilitator of trade and economic activity. MAS will shortly publish a monograph
on our approach to effective regulation.
Effective supervision
13. The second pillar is effective supervision. Globally, there has been much discussion
on having better rules, but not enough on strengthening day-to-day micro prudential
supervision.
14. An eminent ex-central banker once likened this financial crisis to a massive accident
on the highway. To prevent future accidents, if we assess that all drivers are irresponsible,
we would have to drastically reduce the overall speed limit. But if we assess that we could
also do a better job to take errant drivers to task early, we would have to also focus on
strengthening the effectiveness of enforcement. We can then afford to be more measured
and targeted in our rule-making. I believe reinforcing sensible rules with good supervisory
judgements achieves a better outcome than acting on just one or the other.
15. However, effective supervision is not easy. The spectrum of supervisory issues will
continue to expand and evolve. The economic and financial landscapes are changing rapidly,
and interactions remain complex even as we seek to simplify the system.
16. Globally, financial supervisors are responding to this challenge in two ways.
17. First, many countries are now considering changes to the institutional structure of
their supervisory authorities in the aftermath of the crisis. In this regard, MAS is rather unique
in combining financial sector regulation and supervision, central banking and development
responsibilities under one agency. This structure has served us well. Building on this, MAS
recently implemented a revised organisation structure. Aimed at broadening and deepening
our management bench, this structure would also serve to enhance our ability to respond
more effectively to supervisory challenges ahead, and to derive greater synergies from the
combined structure.
18. Second, many financial supervisors are stepping up their investment in building up
and enhancing their supervisory resources and capabilities. The crisis has underscored the
need for financial supervisory authorities to have adequate and well-trained staff, so as to
cope with the demands of supervising financial institutions in a fast-moving, complex and
challenging operating environment. To maintain a high degree of confidence in the quality of
supervision, we recently set up the MAS Academy and devote considerable resources into
training and developing our central banking and supervisory staff.
Working in partnership with industry: shared outcomes and responsibility
19. However, sensible rules and effective supervision are not enough. We need a third
pillar of partnership, where authorities and financial institutions each take on specific
responsibilities to develop a shared ownership of supervisory outcomes. Indeed, the design
of regulation and the supervisory approach taken should allow for financial institutions to take
on responsibility in contributing towards desired supervisory outcomes where appropriate.
Let me highlight two of these areas, namely the industry's role in improving corporate
governance and in capability building.
Corporate governance
20. One lesson from the recent crisis is that good corporate governance matters. The
failure by Boards to exercise effective risk management oversight had damaging
consequences for many institutions. Boards play a vital role in safeguarding the safety and
soundness of their institutions by setting the risk appetite, remuneration policies and strategic
direction, amongst others. For directors to discharge their responsibilities, they have to have
the requisite knowledge, skills and experience.
21. MAS will place increasing emphasis on the quality of the board of directors of
financial institutions. Among the proposals to enhance our Corporate Governance
Framework for locally incorporated banks and significant life insurers is the requirement for
financial institutions to assess the current skills of their Boards on an ongoing basis, and to
establish a continuing development programme for all their directors. Given the important
role that the banking industry plays in our economy, MAS is also considering developing a
mandatory training programme for bank directors.
22. But let me add that rules, and mechanical compliance with rules, can only go so far
in encouraging good corporate governance in organisations. What matters most is for Board
and management members to embrace not just the letter of the rules but the spirit of the
rules, to take ownership of outcomes, and to internalise the essence of these rules in the
ethos and practices of the organisation. Corporate governance in our financial institutions
have improved over the years. We must continue this partnership between the authorities
and the corporate sector to seek continual improvements in corporate governance which will
underpin Singapore's reputation as a trusted financial and business hub.
Capability building
23. The other area for collaborative partnership is in building up the capabilities of
financial industry professionals. Asia's financial services industry is likely to grow rapidly. If
this is not underpinned by an equally rapid growth of capabilities, whether it is in the front
office or the mid-back office, we risk a major disruption ahead. It is essential that we act
premptively to address this.
24. MAS has been working closely with the industry and with organisations such as the
Institute of Banking and Finance (IBF) and the Workforce Development Agency (WDA) to
increase the supply of skilled talent and to build professional capacity. It is heartening to see
that the industry-led initiative in developing the Financial Industry Competency Standards or
FICS for short is gaining traction, and despite the financial crisis, investment in training has
not become an easy target for cost-cutting measures.
25. Such efforts should continue apace. Now that financial conditions have improved
and firms are hiring again, financial institutions must invest in recruiting and developing their
own staff. Taking the easy option of poaching staff from competitors to meet business
expansion will undermine the collective strength of the industry in the long term, with adverse
consequences on growth prospects for the industry as a whole.
26. To complement industry efforts in capability building, MAS would be prepared to
consider regulatory initiatives to bring about a better-trained and more competent financial
sector workforce. In the area of consumer banking, for example, some industry players have
suggested the idea of a national examination to test the competencies of relationship
managers serving customers in this segment. This could include topics such as ethics and
conduct, so as to further promote fair dealing outcomes between industry players and
endconsumers. MAS is now studying the idea and will work with the industry to develop this
further.
Conclusion
27. Let me now conclude. Asia's financial systems and institutions are facing
considerably less pressure for financial restructuring and regulatory reform in the current
crisis. While Asia has not emerged unscathed, significant structural changes made after the
Asian Financial Crisis have enabled the region's financial systems to weather this crisis
relatively well.
28. But there is no room for complacency. Even as we recognise the need to continue
development of our financial markets, considerable risks and policy challenges still remain
for the region. MAS will continue with our three pillar approach of sensible rule-making,
effective supervision and partnership to achieve the desired outcome.
29. We should take advantage of the global reform agenda to strengthen our regulatory
and supervisory regimes, consistent with international standards and best practices, but at
the same time, doing it in a manner that is sensitive to our regional environment and needs. I
am confident that with financial supervisors and the industry working together in partnership,
we can further enhance the resilience of our financial system to better serve the economic
aspirations of Asians going forward. I wish you a fruitful conference. Thank you.