UNITED STATES SUB-PRIME MORTGAGE

UNITED STATES SUB-PRIME MORTGAGE:

(Exposure of local financial institutions): 4.

Dr Lily Neo asked the Senior Minister what is the extent, if any, of our local financial institutions being exposed to the United States sub-prime mortgages and, if so, what is this amount and how much write-offs of these loans are estimated.

The Minister for Education and Second Minister for Finance (Mr Tharman Shanmugaratnam) (for the Senior Minister): Sir, Dr Neo has asked about the exposure of our local financial institutions to the US sub-prime mortgages, and what the write-offs of these loans are likely to be. Our local financial institutions do not offer mortgages to sub-prime customers anywhere. They do, however, have investments in collateralised debt obligations (CDOs) that contain some US sub-prime mortgages. CDOs are essentially debt instruments that are backed by financial assets, which could include loans and bonds sourced from various jurisdictions.

The local banks have publicly disclosed that their total investment in CDOs amounts to S$2.3 billion, of which 28% contain some US sub-prime mortgages. I do not mean that 28% of that total figure is US sub-prime mortgages but 28% of their exposure comprises CDOs which contain some US sub-prime mortgages. The local banks' exposure to US sub-prime mortgages is therefore small in relation to their capital base. Even if we

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take the total value of these CDOs that they have exposure to, which contain some US sub-prime mortgages, the amount would be about 1% of the banks' capital base. However, the affected CDOs are in fact well rated as they comprise mainly investment grade assets, not sub-prime assets.

One of the local banks, DBS Bank, has also stated that it has a contingent line of liquidity support to a legal vehicle holding CDOs and that this facility has since been drawn upon. It has also stated that the vehicle does not have underlying assets comprising US sub-prime mortgages.

While the CDO portfolios of our local asset management companies contain some US sub-prime mortgages, these are managed on behalf of their clients, who are mainly institutional investors. The investment risks are borne solely by the latter, with no legal recourse to the companies.

Some of our local insurance companies have also invested in CDOs, but the amounts account for a very small proportion of their total assets.

The local financial institutions are continuing to monitor the situation and keep the MAS posted of their exposures.

Dr Lily Neo: I have three supplementary questions. May I ask the Minister in what instances will our Government intervene by increasing the liquidity into the market, similar to what the US Federal Reserve Bank has done? How necessary are these measures in the light of the shortage of liquidity in global markets?

Lastly, what are the measures taken to ensure transparency, such that banks are not unknowingly exposed to collateralised debt obligations, similar to what was experienced by DBS during the sub-prime crisis recently?

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Mr Tharman Shanmugaratnam: Mr Speaker, Sir, on the first question which concerns the circumstances under which the MAS would want to intervene to provide additional liquidity to the market, MAS would only need to do so if there is a systemic crunch, in other words, systemic shortage of liquidity in the markets, such that normal lending and borrowing, between banks especially, is not taking place. This has not been the case so far. In fact, so far, MAS has not had to do anything extraordinary beyond its normal money market operations. The Singapore market has not suffered from a shortage of liquidity. There was a very temporary blip, I believe, on 10th August 2007, which was the day after the European Central Bank had made a very substantial injection of liquidity in the European markets - very temporary blip in local inter-bank interest rates, which subsequently reversed itself and we are back to pre-crisis levels. The Singapore Inter-Bank Offer Rate (SIBOR), which is a good indicator of liquidity in the market, is back to the level it was before 10th August - about 2.5%. That is a good indication that the market has been stable, liquidity has been ample and MAS has not had to intervene to do anything extraordinary. Of course, MAS stands ready should the situation arise to inject liquidity in the market to prevent systemic shortage of funds. That has always been the case, and remains the case going forward.

On her second question on transparency, first, let me say that the local banks, DBS included, did make prompt disclosure of their exposure to US sub-prime mortgages. They were asked and they responded very promptly, including DBS. DBS subsequently made a further disclosure of its exposure to collateralised debt obligations which did not contain sub-prime mortgages. That was not asked of them in the first instance, but they made the disclosure a few days later so as to provide a complete picture. And

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as I have explained earlier, the exposure to CDOs in general was not one that affected perceptions of their exposure to the US sub-prime problem. We are satisfied that they made prompt disclosures. The market too, if we look at what the analysts said, if we look at Fitch, for instance, which is the major institution that has market analyses and ratings of bonds, it has commended the Singapore banks for their thorough disclosure of their exposure to the US sub-prime mortgage problem. There is no convention on this internationally, and indeed many banks internationally have yet to fully disclose their exposure both to US sub-prime as well as to CDOs in general. Our banks have done so. They did so promptly and the market has assessed that their financial position is sound arising from the full disclosure of their exposure.