GOVERNMENT GUARANTEE ON DEPOSITS

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GOVERNMENT GUARANTEE ON DEPOSITS:

(Statement by the Minister for Trade and Industry):

The Minister for Trade and Industry (Mr Lim Hng Kiang): Mr Speaker, Sir, the global economy is slowing and the international financial system is still under significant stress. Amidst the current turmoil, the financial system in Singapore remains stable and robust. Financial institutions in Singapore continue to be sound and to operate normally. Our local banks and finance companies are financially strong and well-capitalised. They meet capital adequacy ratios in excess of MAS' requirements, which are in turn higher than international standards. Foreign banks in Singapore are subject to strict licensing and admission criteria, and are required to maintain assets against their liabilities by an appropriate margin. Our financial markets remain stable and calm, and financial institutions in Singapore do not face funding difficulties in the interbank market. Public confidence remains high, and we have not had to take extraordinary measures.

Why the need for Government guarantee

Nevertheless, the Government has carefully assessed the international situation and its implications for Singapore. The actions taken by

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governments and central banks over the last few weeks in Europe and the US to recapitalise banks, purchase bad assets and guarantee bank borrowings in the wholesale markets have improved confidence in the international financial system, even though there remain significant problems and stresses. However, the announcement in the past week by a few jurisdictions in our region of blanket government guarantees on all bank deposits could potentially have a more direct impact on Singapore. Last Thursday, the Singapore Government announced a guarantee on deposits of individuals and non-bank customers with banks, finance companies and merchant banks in Singapore until 31st December 2010. We have decided that such a guarantee is necessary for the following reasons.

First, the guarantee ensures a level international playing field for banks in Singapore. The recent announcements in the region of blanket government guarantees on deposits set off a dynamic that puts pressure on other jurisdictions to respond or else, risk disadvantaging and potentially weakening their own financial institutions and financial sectors. If Singapore had not introduced a similar guarantee, there was a real risk that depositors would have shifted some of their deposits out of Singapore banks to banks in other jurisdictions which guarantee deposits. This would have weakened financial institutions here. The Government has therefore taken a precautionary step to pre-empt and avert any such possibility.

Second, the guarantee bolsters the confidence that the public has in Singapore's financial system. It provides certainty to Singaporeans during such challenging and uncertain times in the international environment, notwithstanding that in Singapore, our institutions are fundamentally sound.

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Third, financial services are an important pillar of Singapore's economy, accounting for 12% of GDP and 5% of Singapore's employment. Beyond this substantial direct contribution to GDP, the financial sector plays a critical role in intermediating credit for the economy, and in providing other critical financial services to companies and depositors in Singapore. It is, therefore, important for the whole economy that the financial sector continues to function normally. Should financial institutions in Singapore become less competitive or credit becomes less readily available, it would hinder the financing of economic activities and raise the borrowing costs of businesses. This would aggravate the already challenging economic situation and thereby adversely affect our growth and jobs.

Fourth, this financial crisis is not confined to any country or region, but is a global one. Singapore's guarantee of deposits demonstrates our confidence in the soundness of our financial system, and helps contribute towards restoring confidence in the international financial system.

Mr Speaker, Sir, let me now explain why we are confident that guarantee is sufficient and prudent.

Why the guarantee is sufficient and prudent

The deposits of individuals and non-bank customers with banks, finance companies and merchant banks in Singapore amount to about S$700 billion. In view of MAS' stringent regulations and close supervision of financial institutions in Singapore, their strong capital and asset positions, and the potential support that foreign institutions in Singapore can avail themselves of where necessary under the government guarantees provided by their home jurisdictions, MAS and the Ministry of Finance have assessed that the backing of S$150 billion of the

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Government's reserves provided to the guarantee would be more than sufficient.

Let me explain. First, the likelihood of a bank failure as a result of problems in Singapore is small as our banking system is sound and closely supervised, even though it is possible that problems elsewhere will affect a bank's operations in Singapore.

Second, even if a bank were to fail here, it should still have substantial assets to meet its liabilities to depositors. Under the law, non-bank depositors enjoy priority in being paid, ahead of other unsecured creditors. This makes it more likely that the failed institution will have sufficient assets to pay out to depositors. Hence, for the guarantee to be called, two things have to happen: a bank has to fail, and at the same time its assets must be worth so little that there is not even enough to repay its depositors. Even then the draw on the guarantee should only be for the shortfall, which should be a fraction of the deposits outstanding.

Hence, we have calculated that the S$150 billion backing is an amount that will be ample to meet any eventuality except the most remote. S$150 billion does not in any way reflect an estimate of the likely draw over the two years of the guarantee. On the contrary, we expect the actual draw to be small or, if we are fortunate, even zero. Instead, the S$150 billion reflects the Government's confidence in the banking system, and its intention to give all depositors that same confidence.

Singapore is in a good financial position to provide this guarantee because of the fiscal discipline of successive governments. We are in a strong fiscal position, having accumulated surpluses during good times for exigencies just like this. In contemplating making this guarantee, the Government has carefully assessed that it is well within our means, does not impair our ability to meet all

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government obligations and will not jeopardise Singapore's financial standing. We are using our reserves to back this guarantee. In the event of a payout, past reserves may be drawn upon. The Minister for Finance has sought and obtained the President's concurrence to issue the guarantee, as required by the Constitution because of the President's role in safeguarding our reserves.

I should also make clear that this guarantee does not impact at all on MAS' ability to defend the Singapore dollar. That is because even after giving this guarantee, the Government still has ample means, with the full backing of our not insignificant reserves, to safeguard our currency if this should prove necessary.

To prevent financial institutions abusing the guarantee by expanding aggressively and taking on excessive risks, MAS has emphasised to financial institutions in Singapore the need to remain prudent in this current operating environment. MAS will continue to supervise financial institutions in Singapore closely. It will take the necessary actions to see to it that they operate in a sound manner, and do not put at risk the stability of our financial system or the Government's reserves.

Mr Speaker, Sir, let me reiterate that Singapore's financial system remains sound and we are well-placed to meet the challenges facing us. This global crisis is unprecedented, and requires Singapore to respond effectively, decisively but also prudently. The provision of a Government guarantee on deposits is a necessary temporary measure to protect the interests of Singaporeans and the economy, which are in turn dependent on a strong and competitive financial sector. The risk of drawing on the guarantee and potential impact on Singapore's reserves are low. This is a measured, precautionary

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action that will help us to weather the global economic slowdown and the ongoing financial crisis in international financial markets.

Mr Inderjit Singh: Sir, I am glad that the Government reacted by giving the guarantee on Thursday. I would have thought that, given that we have a strong financial system and fundamentals in Singapore, we should have been the first to react in Asia, maybe after Europe. We could have been the first to react in the world. Now that we have done so, that is good news for us. I am asking that MAS be proactive and to act fast in case any changes come. We should be among the first to react to give confidence to everyone.

There were cases of people who were withdrawing their money and keeping it below their pillows – I was told by my classmate – and I think that is unhealthy. Had we guaranteed it earlier, I think we could have avoided this position.

Second question: by guaranteeing the deposits for all banks in Singapore, how will MAS proactively monitor foreign banks which may take deposits from Singapore that are guaranteed by the Government, and then use these deposits outside Singapore to maybe invest and help defend their own foreign subsidiaries and home-based companies?

Mr Lim Hng Kiang: First of all – as I emphasised in my statement – the financial system in Singapore is robust, stable and orderly, so there was really no reason for us to react. It does not mean that if the US and the EU put in various measures to support the system that we must do likewise. There was no necessity for us to do so.

But when governments in our region decided to have blanket guarantees in deposits, first in Australia and then in Hong Kong, I think it sparks off a dynamic

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and creates a potential problem for us, as I have explained in my statement. For example, Australia guarantees foreign branches of Australian banks. So the deposits of a branch of an Australian bank in Singapore are guaranteed by the Australian government. In Hong Kong's case, they guaranteed the branches of foreign banks situated in Hong Kong. So the deposits of DBS branch in Hong Kong are guaranteed. Once that is done, I think it sets off a different situation and it sets off a dynamic.

Unlike your grassroots leaders who put money under the pillow, my grassroots leaders tell me that even though they want to continue supporting Singapore banks – they know that Singapore banks are well regulated and very strong – but if a branch of an Australian bank offers guaranteed deposits for their Singapore dollar deposits, then there is a lot of pressure for them to be on the safe side. Nothing about being disloyal but just to be on the safe side.

Similarly, if you are a DBS customer and you can shift your deposit to a branch in Hong Kong and that is guaranteed, you are still supporting a Singapore bank but now your deposit is booked in Hong Kong. So we do not have to wait for all these things to happen. I think we know that such a blanket guarantee by surrounding countries would spark off a dynamic and, therefore, we had to act. On the same day that we acted, Malaysia also provided similar guarantees.

Other countries have assessed their needs and have done so differently. For example, Indonesia has increased the level of deposits that is being guaranteed, not unlimited but they increase the ceiling. So I think this is a development which caused us to have to move. If we had moved earlier, we may have been the one setting off the dynamic and I do not think that is the right thing for us to do, because our

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banks are stable and there is really no reason for us to be guaranteeing all deposits in Singapore.

His second question is that branches of foreign banks in Singapore may be tempted to increase the level of deposits here, remit their money overseas, and invest or support their parent operations overseas. This is something that we are very mindful of and MAS, in its supervision of the various banks, especially branches of foreign banks in Singapore, will insist that as the deposits increase in

their branch here, they have corresponding liquid assets which are invested in Singapore to match these deposits.

Mr Zaqy Mohamad: I have a principled question for the Minister. Did we really need to do a blanket guarantee for the banks? Could we have kept it to the local banks? Two questions arise from that. Firstly, with regard to foreign banks, Mr Inderjit has talked about foreign banks financing their operations out. But there is also the issue of foreign banks not being regulated per se in terms of the parent bank being more susceptible to collapse, for example, and therefore we do have to guarantee using Singaporeans' savings, Singaporeans' money, for these foreign banks. And, secondly, we are also looking at foreign investors. We are also using Singapore's reserves and Singapore's money to support these foreign investors and depositors. Could the Minister please explain? Did we consider the alternative of keeping the guarantee just to local banks, protect the interest of our local banks and to strengthen them at this time?

Mr Lim Hng Kiang: Mr Speaker, Sir, as I have explained in my statement, our action was targeted at safeguarding and defending the financial system in Singapore and the whole of the financial sector in Singapore, and the importance of that financial sector to the overall

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economy. Therefore, the financial sector in Singapore comprises not just the local banks but all the banks that constitute this financial system. And, therefore, we felt it necessary that this is not just a question of protecting deposits. This is a much larger agenda. The larger agenda is that we want to make sure the finanical system in Singapore continues to contribute to our growth and our employment, and therefore that would involve the foreign banks; and the ability of the entire financial system to service the economy.

Mr Cedric Foo Chee Keng (West Coast): Sir, it is reassuring to hear from the Minister that our banks are sound and the guarantee was really necessitated by the actions of other central banks. But the various banks in Singapore obviously have different balance sheets and different credit standing. Would the Government be charging the banks and financial institutions a guarantee fee and, if so, on what basis would it do so?

Mr Lim Hng Kiang: These are details which I would rather not go into in this House. Suffice to say, MAS will be sending out detailed instructions to the banks on how they will be regulated in taking these new deposits, and the basis for which charges for this guarantee will be levied.

Ms Irene Ng Phek Hoong (Tampines): Singaporeans have been shocked by how reputable banks in foreign countries like the US and UK have been collapsing. Can I ask the Minister what is the position of Singapore in terms of bailout of Singapore banks if they collapse? I think Singaporeans would like to hear what the Singapore Government's view is considering how other countries like the US and UK have reacted to similar problems.

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Mr Lim Hng Kiang: Mr Speaker, Sir, our approach and our principles were highlighted in my answer earlier where I explained that we do not look at bailouts and deposit insurance as the main lever. We start off by preventing problems from arising and that means proper supervision, proper capital adequacy ratio, good business models, good lending practices and controls – all that is covered in my answer earlier. All this goes to make sure that our banks here are stable. Our banks here have a good business model. They have a stable deposit base for which they conduct their lending operations. They are not so highly leveraged like other banks in other countries. They are not vulnerable because they are not dependent on the wholesale interbank market. And, therefore, during this liquidity crunch, they do not come under pressure like other banks overseas. So our banks are in a very strong position because of all these conditions and regulations, and we intend to keep it that way.

Dr Teo Ho Pin (Bukit Panjang): Sir, the deposit savings interest rates of our local banks are usually much lower as compared to the interbank lending rates. I think this is one of the reasons which motivated a lot of Singaporeans to put their money into other high-risk investments. So I wonder whether MAS will consider narrowing the savings interest rates and interbank interest rates.

Mr Lim Hng Kiang: Mr Speaker, Sir, the interest rates are set by the market and MAS does not intend to intervene the market. So the interest rate will reflect market forces of demand and supply for funds.

Mdm Halimah Yacob: Sir, when the US Senate approved the bailout package of US$700 billion, it also imposed certain conditions and one of it is that the senior leaders of the bank should not be paid excessively. Is there no consideration of such a condition imposed in our bailout package as well?

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Mr Lim Hng Kiang: Mr Speaker, Sir, this is not a bailout ( Laughter). In case the Member has not listened to the statement, this is a deposit insurance, a guarantee on deposits that we extended because we want to protect the banks in the financial system, and because we want to protect the financial system that is so critical to our economy and to all Singaporeans, and the preservation of our growth and our jobs.

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