EFFECTS OF FINANCIAL TURMOIL ON SINGAPORE'S BANKS AND INSURANCE COMPANIES AND IMPACT ON SINGAPOREANS

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EFFECTS OF FINANCIAL TURMOIL ON SINGAPORE'S BANKS AND INSURANCE COMPANIES AND IMPACT ON SINGAPOREANS: 4.

Mdm Cynthia Phua asked the Senior Minister (a) what is the impact of the recent financial upheaval on Singapore’s banking and insurance companies; (b) what steps are being taken by the Monetary Authority of Singapore (MAS) to review the exposure of our financial institutions to high-risk instruments; (c) how does MAS monitor the investment risks of insurance companies in Singapore; (d) what is the process for local banks and finance houses to report on their exposure to high-risk financial instruments overseas; and (e) what safeguards are in place to protect our depositors from any catastrophe impacting the financial institutions in Singapore.

5.

Dr Lily Neo asked the Senior Minister (a) to what extent are Singaporeans affected by the collapse of American financial institutions such as Lehman Brothers; (b) how many Singaporeans are losing their savings as a result of this crisis; and (c) what are the safeguards, if any, to protect Singaporeans' savings in financial institutions

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and insurance companies from similar financial turmoil.

6.

Mr Inderjit Singh:

Mr Inderjit Singh asked the Senior Minister in view of the meltdown of the financial sector in United States (a) if he will provide an update on the state of our financial institutions especially banks operating from Singapore and their ability to meet the obligations of customers; (b) whether any of the financial institutions operating in Singapore have been weakened by the meltdown; and (c) what additional measures have Monetary Authority of Singapore put in place as lessons learnt to ensure that financial institutions remain viable to protect consumers.

Mr Inderjit Singh asked the Senior Minister (a) if he will explain the impact of the AIG bailout on insurance companies in Singapore; (b) what protection do Singaporeans have in the event that any of the insurance companies operating in Singapore become affected by the financial crisis; and (c) what measures are in place to cushion subsidiaries of foreign insurance companies operating in Singapore from such crisis.

8.

Mr Low Thia Khiang asked the Senior Minister (a) what is the basis for the Monetary Authority of Singapore's assurance to AIA Singapore policy holders that there are sufficient funds to meet future obligations; and (b) whether MAS is aware if AIA Singapore has invested in products related to Lehman Brothers and United States sub-primes derivatives.

9.

Ms Sylvia Lim asked the Senior Minister whether there is any evidence or indication that the American banks and financial institutions currently in distress have taken steps to sell off their Singapore properties on an urgent basis and, if so, what implications will this have on the local property market.

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10.

Mr Gautam Banerjee asked the Senior Minister whether all insurance companies operating in Singapore can (i) put in place measures and/or programmes to educate policy holders and the public at large on the nature of risks involved in different insurance policies such as investment-linked products, par and non-par funds; and (ii) be more transparent in sharing and explaining information on investment, capital adequacy and solvency requirements.

Mr Lim Hng Kiang (for the Senior Minister): Mr Speaker, Sir, can I have your permission to take Question Nos. 4 to 10 together?

Mr Speaker: Yes.

Mr Lim Hng Kiang: Mr Speaker, Sir, Mdm Cynthia Phua, Dr Lily Neo and Mr Inderjit Singh asked about the effects of the recent financial turmoil on banks and insurance companies in Singapore and the impact on Singaporeans. Let me explain the impact of the developments on financial institutions in Singapore, the actions that MAS has taken, and why Singapore is well placed to weather the uncertainties ahead.

The US is reeling from the bursting of a credit bubble. Much of the credit found its way into home loans. Some of these loans were made to borrowers without properly checking if they could afford to repay. These loans were securitised; the papers were widely distributed and heavily leveraged. When the housing market turned and house prices fell sharply, many borrowers could not repay their home loans. This has resulted in losses for US and European financial institutions holding mortgage loans and securities backed by those loans. This triggered a process of deleveraging in the housing and credit markets that started in the middle of last year, and is continuing.

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The situation in Singapore is different. We do not have the problems that the US banks are facing. Our banks have been responsible in their lending practices. Banks and insurance companies in Singapore do not have large exposures to either US mortgage-related securities or to the institutions that have failed. Nor do we have subprime mortgages that are originated here. The three local banks are very well-capitalised and their asset quality remains strong. Singapore's financial system is sound and stable, and has not been significantly affected so far. Let me elaborate further.

MAS requires the assets of our banks and insurance companies to exceed their liabilities by an appropriate margin, which is set in accordance with MAS' standards. This provides the bank or the insurance company with a buffer to absorb unexpected losses. The riskier the financial institution's assets, the higher will be the safety margin. The quality of our banks' and insurers' assets remains good, and their capital buffers remain strong. Taken together, this means that a bank or insurance company in Singapore will have more than enough assets to pay what it owes to its depositors and policy holders.

In the case of foreign banks, MAS maintains high admission standards to determine which institution is permitted to operate in Singapore. Foreign banks, however, maintain significant operations in their home country and internationally, and MAS alone does not determine the solvency of these institutions. MAS, however, keeps in close contact with the foreign bank's home regulator to assure ourselves that the bank continues to meet high standards of solvency and maintain sufficient assets to meet all its liabilities in Singapore and elsewhere.

Solvency alone is insufficient, and banks and insurance companies also have to address their liquidity risks. MAS requires both banks and insurers to

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anticipate their cashflow requirements arising from business needs and the claims of depositors and policyholders and to hold sufficient liquid assets to meet these claims. In addition, MAS requires banks to maintain a significant buffer of liquid assets to meet unanticipated claims from depositors. Insurers' asset portfolio typically comprises more liquid assets such as bonds and Government securities which are more easily liquidated to raise cash should the need arise.

Let me now turn to supervision. MAS generally adopts a conservative approach to the supervision of financial institutions in Singapore, and this has served us well. MAS monitors the financial positions of regulated financial institutions through regular reports of their assets and liabilities submitted by these institutions. MAS limits the amount that banks here can lend to any single borrower. This ensures that they are not overly exposed if any single borrower defaults. In addition, the Banking Act limits a bank's credit and loan exposure to property development and investment activity to 35% of its total non-bank loan and credit exposures. Most banks here are significantly below this limit. In the last two years, MAS has also required all banks with significant operations here to enhance their risk management system, as part of the transition to Basel II, a more risk sensitive international standard for capital.

MAS has been closely monitoring developments in global financial markets and the impact on Singapore. The interbank markets in the US and Europe have not been functioning properly as banks, concerned about the solvency and liquidity conditions of other banks, have not been willing to lend to one another other. In Singapore, our domestic interbank markets have been relatively calm and have functioned in an orderly manner. Sufficient liquidity was maintained in the banking system. In

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anticipation of tighter lending conditions, MAS had in July expanded its Standing Facility to all MAS Electronic Payment System (MEPS+) participant banks. This provides assurance that banks can readily access central bank liquidity when required. MAS has also reiterated that it stands ready to inject additional liquidity if needed.

Ms Sylvia Lim also asked if there is any evidence of distressed American banks and financial institutions having to sell off their Singapore properties on an urgent basis and the implications on the local property market. The funding pressures that have arisen in the US and Europe do not arise in Singapore domestic market. The Singapore property holdings of US and European banks are small in relation to our market. Moreover, all banks here have a wide range of assets including corporate and consumer loans, substantial holdings of Singapore Government Securities, and other securities and assets which are not related to property.

Mr Speaker, Sir, to summarise, the crisis in the US and Europe is serious. We have seen some of the largest financial institutions in those countries come under severe solvency and liquidity pressures. AIG, for example, which had huge exposures in the credit derivatives market, experienced losses and had its credit rating downgraded. This triggered liquidity pressures forcing US authorities to provide a loan to prevent AIG from defaulting on its obligations and being pushed into bankruptcy. Banks in the US and Europe have been unwilling to lend to each other. This has prompted the European and the US governments to take extraordinary measures in recent weeks to recapitalise their major banks and guarantee bank borrowings. This has improved confidence in their markets and banking systems. While the situation has

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improved with the announcement of these major initiatives, we are not out of the woods and substantial challenges remain in the international financial system and the global economy.

Given the openness of our economy and our role as an international financial centre, we cannot hope to be decoupled from what is happening in the global financial markets. We must, therefore, stay highly vigilant on the channels through which global developments can affect us. MAS has, for some time now, stepped up its surveillance of international developments and is also in close contact with regulators and central banks in other jurisdictions.

Singaporeans are anxious about the impact of the US financial turmoil on their savings and insurance policies. I thank MPs for raising these concerns. Let me now address the specific questions posed. Mr Low Thia Kiang asked about AIA Singapore's exposure to Lehman Brothers and the US sub-prime market. I am happy to assure him that the exposure is limited.

Mr Inderjit Singh asked about the impact of the AIG bailout on insurance companies in Singapore. The bailout of AIG does not directly impact other insurance companies in Singapore besides the AIG related insurance entities here. The bailout, in fact, has given AIG time to address its deteriorating financial position and, with its recent announcement to sell some of its businesses to restore AIG's financial strength, AIG policyholders can be more assured that AIG will be able to meet its obligations to its policyholders. AIG has also announced that it would continue to operate most of its life insurance business in Asia, including Singapore. This has given some assurance to policy holders of the continuity of their policies with the same insurance provider.

Mr Banerjee asked if insurance companies can put in place measures to

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educate policy holders and the public at large on the nature of risks involved in different insurance policies, as well as the financial strength and performance of the insurers. The Life Insurance Association and General Insurance Association have been working with MoneySENSE, the national financial education programme, to conduct free public talks and publish consumer guides on different types of insurance policies, such as participating policies, investment-linked policies, health policies, and motor policies. These guides are available on the MoneySENSE and the two associations' websites.

There are also various avenues to obtain financial information on an insurance company. MAS publishes on its website the annual statutory returns of insurers containing information on the type of investments and solvency positions of individual insurers. In addition, some insurers publish financial information on their corporate websites and/or in their annual reports. MAS also requires insurers to provide their participating life insurance policyholders information on the investment strategy and broad investment mix of the participating fund as well as the performance of the fund on a regular basis.

Dr Lily Neo and Mr Inderjit Singh asked what safeguards are in place to protect policy owners and depositors if an insurance company or a bank should fail. Let me reiterate that the most important safeguards are what I have just outlined earlier, ie, high admission standards, standards of solvency and liquidity and rigorous supervision, as well as the functioning and orderly interbank market. Our focus has been, and must continue to be, on preventing problems in the first place. However, in the worst case scenario that a bank or insurance company fails, policy owners and depositors have higher priority under the law than other unsecured creditors to

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claim against the assets of the insurer or the bank.

The additional line of protection is in the form of the policy owners' protection fund (PPF) and the deposit insurance schemes. The PPF protects 90% of what the insurer is liable to pay to the owners of life policies. The protection is 100% for compulsory insurance policies for motor bodily injury and work injury. As Members would be aware, the Government announced a guarantee on all deposits last Thursday. I will say more later in my Ministerial Statement.

Mr Speaker, Sir, I want to assure Members that the confidence that depositors and policyholders have in the stability and soundness of Singapore's financial system, and in the protection and priority they are accorded under the law, is well-placed.

Mr Inderjit Singh (Ang Mo Kio): Mr Speaker, Sir, I have two questions. The first is whether any of our local banks has applied for liquidity assistance from MAS. In the light of what is happening right now, MAS has offered its help. Has any of the banks come forward to seek liquidity assistance?

Second, there were reports of AIG wanting to sell AIA, the life insurance arm of its business. Would MAS intervene when this happens to ensure that the buyer is someone who is legitimate and able to guarantee the insurance policies of members?

Mr Lim Hng Kiang: Mr Speaker, Sir, as I have explained in my response earlier, the banking system in Singapore is sound. The interbank market here has been operating efficiently and orderly.

We do have instances, during the severe volatilities faced in the international financial markets, where there were concerns about liquidity and MAS

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would, of course, inject liquidity into the system as and when required. But there have not been specific applications for liquidity assistance by any of our financial institutions here.

On the second question of AIG's desire to sell off its AIA operations in Asia, this is something that is still being pursued and MAS will address the issues when the application does arise.

Dr Lily Neo (Jalan Besar): Sir, may I ask the Minister whether he concurs that many retail investors, especially the lesser educated retirees, did not have a fair deal when buying the structured notes linked to the now bankrupt Lehman Brothers, due to the fact that these products were sold on the strength of reference entities, such as DBS Bank? The risk to investors was not adequately provided by incentivised sale managers, the prospectus had financial jargons and voluminous information, and Lehman was listed as the arranger and the swap counter party in small print.

Could I ask for the Minister's comments whether these retail investors have fair recourse for compensation under the Consumer Protection (Fair Trading) Act?

My second question, Sir, is whether MAS will regulate the sale of such convoluted swap-based products and instruments marketed as bonds to retailers in Singapore?

Mr Lim Hng Kiang: Mr Speaker, Sir, can I have your permission to answer these two supplementary questions when I answer the next set of questions which is Question Nos. 11 to 16?

Mr Speaker: Yes.

Mdm Cynthia Phua (Aljunied): Mr Speaker, Sir, I have two supplementary

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questions. In the last one and a half years, there were a number of en bloc sales. As a result, there are a number of condominium developments and a number of the developers have offered deferred payments. What are the impacts on the financial institutions as well as on the small-time owners and purchasers?

Second, can the Minister shed some light on the factor of the safety buffer margin on our financial institutions?

Mr Lim Hng Kiang: Mr Speaker, Sir, in my response earlier, I referred to the exposure of our banks to the property sector. There is a cap and banks are not allowed to go beyond 35%. In fact, most of our banks stay well below this cap. So the banks and MAS continue to monitor this closely and do a sensitivity test to see what is the impact should the property market decline by different amounts.

As for the impact of the en bloc sales and the deferred payments, this is something that will unfold over the next 18 or 24 months. As of now, as I have said, the extent of the banks exposure is well below the cap and the banks are extremely well positioned to deal with the property downturn.

Mdm Cynthia Phua also asked about the safety buffers. I am afraid there is not one single factor to determine the so-called safety factors. This requires a range of perimeters. Suffice to say, the banks in Singapore have a very high capital adequacy ratio. So if we look at banks here and banks overseas, the capital adequacy ratio here is much higher than other countries.

Secondly, we have to look at the business model and how the banks operate. For example, if we look at other countries, many of the banks there depend on the wholesale market for their funding requirements. Here, our local

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banks have a very strong and broad depositor base, and the loan-to-deposit ratio is comparatively low, compared to other banks. So again, that gives them a lot of buffer.

And if Members have been following the developments in the US, they will find a strange phenomenon that banks with huge depositor base are now considered safer and more stable. In fact, that is the situation here. Our banks are well run and have very strong capital adequacy ratio. The business model that they embark on is more conservative and they have recourse to a very stable depositor base. The interbank market is operating in an orderly manner, unlike in some other countries. So, by and large, our banks are in a very strong position.

Mr Low Thia Khiang: Sir, the Minister in his answer said that AIA's exposure to sub-prime is limited. I would like to know what is the limited amount that he was talking about.

Sir, I also understand that the Insurance Act requires insurance companies to provide a deposit with MAS for each class of insurance business. What is the current market value of deposits from AIA that MAS holds? What is the composition and risk profile of AIA insurance funds? What is the future outlook of the funds to meet future obligations of the policy holders? What is the current solvency ratio of AIA's participating funds in Singapore and whether it has met the requirements under the risk-based capital framework of the MAS?

Mr Lim Hng Kiang: As I mentioned in my response to Mr Banerjee, all these specific details about individual insurance companies and how their specific investment-linked policies or funds are operating, the Member can refer to the company's website, as they have disclosure requirements.

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What I would like to say here is, first, for the insurance companies in Singapore, they operate under a very strict regulation regime. They are required to maintain a capital adequacy ratio of at least 120%. And all the insurance companies in Singapore far exceed this adequacy ratio. Many of them go up to 200% and above. So the Member can refer to the individual insurance company's website for the details.

Mr Sin Boon Ann (Tampines): Sir, the two elements in this crisis are the crisis of liquidity and the crisis of confidence. I think one of the concerns really has to do with the confidence on the part of the financial institutions to continue with the lending. My understanding is that amongst the businesses, the banks are actually restricting on finances and credit extended to the businesses. To the extent that this happens, will it not create a crisis in the real economy, especially where businesses depend on credit to fund the ongoing cash requirements of these companies? And can the Minister assure this House that this crisis of confidence is something that MAS will watch very closely and avoid a situation of a lack of credit within the real business sector?

Mr Lim Hng Kiang: Mr Speaker, Sir, I agree with the Member who placed great emphasis on this issue of confidence. One very useful way to look at how this crisis has developed is actually to see it in its three elements. There is a liquidity problem, there is a solvency problem, and there is also a deleveraging problem. These are not separate silos. In fact, they interact and affect each other. So I think the problem lies beyond liquidity.

For some institutions, it is a solvency problem. Because of the exposure, they are, in fact, insolvent and no amount of liquidity injections is going to save them. For some, it is really a whole deleveraging

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exercise. Credit has been very ample and less then appropriately costed in the past. Going forward, I think it is fair to say that we will not face the same conditions. And corporates and households will have to deal with this new situation where credit will be scarcer and the cost of credit will be higher.

The SMEs and companies that operate in Singapore have to take this into consideration. It is not just a question of liquidity or lack of confidence by the banks. I think there is an overall global deleveraging exercise taking place and our companies will have to look at their business model and those that operate on higher levels of leverage or high levels of loans will have to readjust their business models.

On the part of the Government, as I have explained, we are extending help to all the SMEs and this is already borne out by the numbers. Our loans in the LEFS and LIS Schemes have gone up by 55% compared to last year.

Mr Sin Boon Ann: Sir, the problem is two-fold. One is the business and the other, is the financial institutions. Will the Government be prepared to work with these financial institutions and the SMEs in the private sector to manage the withdrawal of the availability of credit within the economy and to give the assurance and to provide all the assistance that they need?

Mr Lim Hng Kiang: Mr Speaker, Sir, I have given the assurance three times already.