Lee Hsien Loong: Financial centres today and tomorrow: a Singapore
perspective
Address by Mr Lee Hsien Loong, Deputy Prime Minister of Singapore and Chairman of the Monetary
Authority of Singapore, at the International Monetary Conference, Singapore, 4 June 2001.
* * *
Mr Sandy Warner, President, IMC
Ladies and Gentlemen:
Introduction
I welcome all the delegates to this first IMC of the new century. Please allow me to share with you a
Singapore perspective on financial centres as they are and as we expect them to be in the years
ahead.
In the last few decades the pattern of international financial activity has undergone major changes.
Starting with a high concentration in a very small number of financial centres, activity then spilt over to
more locations. But now with globalisation revolutionising the financial industry, and expanding the
worldwide network of financial markets and activities, paradoxically the trend again seems to be
towards concentration, with fewer mega financial centres, complemented by smaller centres with more
specialised focuses.
In Europe, London is the premier full-service centre, with others like Frankfurt and Zurich occupying
strong niches - Frankfurt in the derivatives business and Zurich in private banking. In America, New
York is pre-eminent with Chicago playing a specialised role in financial futures, and Boston in asset
management. Both London and New York are not just continental but global financial centres, where
the top financial institutions have congregated and capital markets run broad and deep.
Asia does not have the equivalent of a London or New York. Tokyo is mainly domestic in orientation,
while the smaller centres of Hong Kong and Singapore play more of a regional role.
The economics of concentration
This trend towards a mega financial centre complemented by smaller specialised centres in each time
zone has persisted, even though technology has allowed market players to obtain information and
transact on it, virtually anywhere. Why has this concentration in activity happened?
Firstly, technology has itself created tremendous economies of scale. This is especially so in
commoditised markets such as foreign exchange and electronic financial services, and in
infrastructural facilities for payments and settlements, back-office processing and call centres.
Secondly, critical mass of talent has become more important, with the growing complexity and
multi-faceted nature of finance. Talented and enterprising investment bankers, fund managers and
currency traders work best when they can interact with other equally bright and capable people, to
strike deals, develop new products, exploit investment and business opportunities, and service clients.
Executing financial deals requires a combination of top talent not only in finance and business, but
also in law, accounting, project management, and information technology. Few centres have the full
spread of necessary skills; fewer still have a critical mass of them. And for all the wonders of
telecommunications and the internet, there is no substitute as yet for face to face interaction between
two parties making a complex deal.
Thirdly, issuers and investors in capital markets are placing a growing premium on liquidity. Capital
markets thrive on breadth and depth; and the broadest and deepest markets are those that transcend
national boundaries. Companies raising funds seek liquid markets, which attract investors and lower
the cost of borrowing. So it is that many Asian companies issue bonds in the Euromarkets, and
technology companies worldwide aspire to be listed on NASDAQ. Investors in turn seek liquid
markets, because in rapidly changing conditions, the ability to move in and out of markets at minimal
cost is critical.
Fourthly, as a result of globalisation, small differences in conditions can translate into large differences
in outcomes. Market participants have always placed a premium on sound and responsive regulatory
systems. They seek jurisdictions that provide stable and resilient financial systems, and fair and
efficient markets, at minimal regulatory cost and impediment to innovation. They prefer conducive
business environments which offer good market infrastructure, favourable tax treatment, and stable
economic and political conditions. And talent has always preferred They
attractive living conditions.
value good schools, safe homes, clean environments, vibrant social and cultural activities, and
competitive remuneration.
In the New Economy, both financial capital and talent have become more mobile. More open financial
markets and more liberal regulatory regimes have enabled institutions to choose where to reside and
operate. Countries have realised that people are the key success factor in the new economy. They
have opened their doors wide to the immigration of talent, and created a single global market for those
whose skills are in demand. So the premium on sound regulation and good living conditions has gone
up.
Location
However, the trend towards concentration is unlikely to end in the extreme of only one or two global
financial hubs. Location still matters even in the globalised financial landscape of the New Economy.
Physical proximity to potential clients will remain important, especially in capital market origination, the
M&A business or private banking, where personal services and physical interactions with clients are
essential. Indeed, the growing customisation of finance to suit local conditions and meet individual
client needs will mean that regional financial centres will continue to play a complementary role.
Competition among financial centres will not be a zero-sum game of winner takes all. Smaller centres
can coexist with the mega centres, focusing on different niches and serving different regions. There
are thus collective gains to be shared through co-operation. Linkages between key financial centres,
both across and within time zones, can help the centres to reap the benefits of integration while at the
same time preserving close access to local communities. Similarly, there is an important role for closer
regulatory co-operation and, where appropriate, harmonisation of standards, particularly in
cross-border listing requirements, ongoing supervision, and accounting and disclosure.
For the regions they serve, international financial centres make good economic sense. They provide
easy access to funding and hedging opportunities, links to other key centres, and markets with liquidity
and reach, especially for emerging economies.
Financial centres tend to prosper when their hinterlands are buoyant. When the hinterland is in
difficulty, the financial centre will be adversely affected, but it still plays an important role in facilitating
the process of recovery. As confidence recovers and investor interest returns, the financial centre will
be an important conduit for the funds required for rehabilitation and growth.
Thus as Asian economies make progress in putting themselves in order, they will need access to
global capital for corporate restructuring and new investments. Singapore's financial centre will be
ready to play that role, whether the capital is to be raised through loan syndication, debt securitisation,
private equity, or bond issuance.
Financial centres in Asia
Looking ahead, the trend towards concentration of financial institutions and activities in fewer major
centres is likely to persist. However, it is not easy to predict which specific cities will emerge as leading
centres. This will depend not only on the static comparative advantage of the different cities, but also
on the dynamic competitive advantages created by their policies and strategies. Incumbents will
always have an advantage, but no lead is totally unassailable, as London found to its dismay in 1998
when within a few months Frankfurt snatched away the trading of German bund futures.
London and New York will continue to be key global players. In Asia, while Tokyo will always be big
and significant, the role of the other centres is still unclear. Hong Kong, Singapore, Sydney, and in the
longer term Shanghai are in play. Each has its advantages and limitations, stemming from differences
in their geographic and political situations, and their regulatory and corporate environments. They will
surely compete amongst themselves to gain market share and critical mass, and anchor in Asia some
of business which presently goes to London and New York. But in my view they also have
considerable scope for co-operation, as each will occupy a distinct market niche and none can
dominate in all aspects of finance.
Singapore will never have the advantage of Tokyo's large economic base. Nor do we have Hong
Kong's physical proximity to China. But we seek to provide a world-class regulatory environment that
responds to the needs of global markets and global institutions, and the most efficient infrastructure for
businesses to use as a platform for all of Asia. Singapore plays host to some 6,000 multinational
corporations and the financial institutions that are their global advisers, many of which use Singapore
as their regional headquarters. And our strategic location at the heart of Southeast Asia and within 7
hours of key markets in Northeast Asia, South Asia, and Australia positions us well to serve as a
financial centre for all of Asia.
Singapore
While the external environment is not within Singapore's control, our strategies and policies are. We
believe that the right strategies and policies will help us to capitalise on opportunities and overcome
disadvantages arising from our size. There are no secrets to the strategies, because the factors for
success are not unique to Singapore. The challenge is in their execution and implementation. Here
are five things that we have set out to do in order to excel as a financial centre in the New Economy.
Enhance business environment
First, we are seeking to further enhance our conducive pro-business environment. Economic and
political stability, an efficient and impartial legal system, comprehensive and up-to-date market
infrastructure, and fiscal discipline that allows low taxes are key preconditions, more important than
special incentives for the financial sector. Singapore has established a reputation for delivering these
preconditions, which we will maintain and improve upon in future.
Build talent pool
Second, we are building up our talent pool. In a knowledge-intensive industry like financial services,
Singapore will not get anywhere without world-class talent. We are making a concerted effort to attract
foreign talent who can make a contribution to Singapore, and to integrate them into our economy and
society. We are also nurturing home talent to its full potential through a good education system for the
young and ongoing training opportunities for those in the workforce.
As Asian companies begin to use more complex strategies and products, our financial institutions
need the expertise to advise on these sophisticated techniques. From time to time they will fly out
experts from London or New York to service clients, but we must also build up our own indigenous
capabilities.
To make the most of our talent, we must create an environment which encourages innovation and
enterprise, rewards those who venture and succeed, and is tolerant of honest failure. This depends in
part on the culture of the society, which takes time to change. But it is also affected by the regulatory
and legal environment. Here we are working to remove impediments to enterprise, for example in the
tax treatment of stock options.
Singapore has long offered a good, wholesome living environment for international talent wanting to
work or sink roots here. We are now paying greater attention to the less tangible aspects of the quality
of life. Our arts and entertainment scene has livened up considerably in recent years. I would still
hesitate to describe Singapore as funky, but certainly it is a far cry from being boring.
The outcome of all our efforts is that one is beginning to hear a distinct buzz in Singapore.
Develop sound and responsive regulation
Third, specifically for the financial sector, we are constantly improving our regulatory and supervisory
regime. Good regulation commands a premium. The rules must be aligned with the underlying risks,
and kept constantly updated, following global best practices. Prudential oversight must be
complemented by enhanced corporate disclosure and market discipline.
The regulator's touch has to be sufficiently flexible and light, to let market forces work, innovation
thrive, and the industry develop. But the regulator must also be vigilant in enforcing prudential
safeguards, with firmness where necessary. A lighter touch does not mean a laxer approach, and
maintaining high standards of integrity, transparency and enforcement is more important than ever.
Foster competition
Fourth, we are opening up to, rather than sheltering from, global competition and the winds of change.
To develop as a financial centre, we must attract global players to locate here and carry out more
activities in Singapore. We have therefore been levelling the playing field for local and foreign
competitors, and opening up hitherto closed parts of the financial industry, including domestic banking,
insurance, and securities trading.
We are completely open in the insurance industry and will be so in the securities industry as well from
next year. We have, however, proceeded more cautiously in banking, where we consider it crucial for
systemic stability to have strong Singaporean banks retain a significant market share. Here our
approach is to liberalise in a phased manner so as to inject more competition and spur the stronger
Singapore banks to upgrade and compete, and not to put off liberalisation while waiting for smaller
players to become strong and confident enough.
We introduced the first banking liberalisation measures two years ago. We are now finalising a second
banking liberalisation package, which we will announce at the end of this month.
Promote key markets and activities
Finally, we are actively promoting the development of specific markets and activities, which have
stronger growth potential. An example is the wealth management industry. Another example is the
debt markets, which until recently were underdeveloped all across Asia.
However, we should focus our resources first on activities where we have a natural advantage, or can
build up a capability. We must push in the same direction as market forces, and not against them. Our
main approach to developing the financial centre should therefore be to establish a level playing field
with transparent rules and the right environment, so that market forces can operate and innovation can
flourish. Active promotion of specific activities complements this.
Conclusion
The major changes in the financial industry compel financial centres to adapt and evolve, or else be
bypassed and rendered irrelevant. Singapore aspires to be one of the financial centres in Asia, and a
node in the global network of financial markets. By implementing the right policies and strategies
vigorously, we hope to develop and grow as a financial centre, serving Asia and contributing to its
development and prosperity.