BANKING (AMENDMENT) BILL

BANKING (AMENDMENT) BILL: 3.19 pm

Order for Second Reading read.

The Minister for Trade and Industry (Mr Lim Hng Kiang): Mr Speaker, Sir, on behalf of the Senior Minister, I beg to move, "That the Bill be now read a Second time."

Over the past few years, MAS has progressively liberalised the banking sector. At the same time, MAS has also sought to implement a risk-based supervisory approach that moves away from the one-size-fits-all rules and allows for well-managed risk-taking. The measures have resulted in more choices for consumers, new innovative products and competitive pricing. With the free play of market forces and the growing complexity and international nature of banking businesses, there will also be new risks to be addressed. For example, depositors are now increasingly exposed to the risks of both local and foreign banks’ expanding international operations.

MAS continuously reviews and refines its regulatory framework to ensure that it is robust and responsive, without adding undue burden and cost to the industry; a framework that upholds prudential standards and the interests of depositors, while fostering the growth of the sector. The Banking (Amendment) Bill is part of this on-going process. It introduces

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several new policies and measures to strengthen prudential standards, facilitate risk-based supervision and provide banks with greater operational flexibility.

In preparing this Bill, MAS has consulted extensively with the industry and the public on the policy changes and the draft Bill. The feedback received was carefully considered, and incorporated into the Bill where practicable and consonant with its regulatory objectives.

Mr Speaker, Sir, I will now go through the major amendments in the Bill.

Strengthening prudential safeguards

The first set of amendments is to strengthen the prudential safeguards. On this, I would elaborate on three main amendments.

First, is the revision of methodologies for limiting large exposures and related party exposures. Currently, section 29 of the Banking Act sets prudential limits on credit facilities extended by banks to a single borrower or a group of related borrowers. It also curtails unsecured credit facilities to parties related to the bank. These prevent the default of any single borrower from seriously impacting the financial strength of a bank.

MAS is introducing a number of changes to ensure that the prudential limits remain relevant and are in line with international best practice. First, instead of a limit based on credit facilities granted, the Bill introduces a more comprehensive measure based on exposures, which would include a bank’s equity investment in, as well as other transactions with a counterparty. The second key change is that MAS will recognise a bank’s efforts in mitigating risks, by allowing the bank to offset its exposures where these are secured by qualifying collateral, or to substitute its exposures to a counterparty with that of a

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credit protection provider of good rating. To reduce the risk of contagion and non-arm’s length transactions between a bank and a related party, the current limit on unsecured lending to related corporations will be widened to restrict the exposures of a bank incorporated in Singapore to its substantial shareholder groups, and exposures of a bank in Singapore to entities in which the bank holds a major stake. The industry will be given a two-year grace period to make the appropriate adjustments for compliance with the revised section 29.

Introduction of an asset maintenance regime

MAS’ liberalisation measures in the last few years have brought about greater foreign bank participation in our banking sector. While the competition has added to the dynamism of the banking sector, the banking system will increasingly be exposed to risks arising from the foreign banks’ international operations. Should a foreign bank fail, the resolution of a cross-border bank insolvency will be complex and drawn-out. The claims of depositors and creditors will be subject to substantial uncertainty.

The revised section 40 aims to strengthen the foreign bank regulatory framework by requiring foreign full and wholesale bank branches to maintain a minimum level of eligible assets in Singapore in proportion to their deposit liabilities. This would help to improve the recovery of assets from a failed foreign bank branch in Singapore to meet the claims of Singaporean depositors.

The asset maintenance requirement has been carefully calibrated to balance prudential objectives with the banks’ commercial interests, and determined after close consultation with the industry. A six-month grace period will also be

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given, for foreign bank branches to make necessary adjustments to their asset allocations.

Amendment of the priority ranking of deposit liabilities

Presently, both non-bank and inter-bank deposit liabilities of a bank rank ahead of other unsecured liabilities in the event of a winding up of a bank. In recognition that non-bank depositors are likely to be less well informed than banks and in greater need of protection, the Bill reorders the priority ranking under section 62 and places all non-bank deposit liabilities of a bank ahead of inter-bank liabilities, with the latter ranking pari passu with other unsecured creditors. This is consistent with the objective of protecting non-bank depositors and encouraging banks to exercise prudence and market discipline in respect of exposures to their bank counterparties.

Enhancing MAS’ role in bank resolution

The next set of amendments is with regard to MAS' role in bank resolution. While MAS seeks to promote and preserve stability in the financial system through high standards of licensing, regulation and supervision, like many reputable regulators, it does not aim to prevent the failures of all financial institutions. Such a "zero-failure" regime is neither feasible nor desirable as it leads to considerable moral hazard for the regulator and places an excessive regulatory burden on our financial institutions. When dealing with a bank in distress or insolvency, a private sector resolution option is often preferred by regulators, but in the event that this is not possible, international experience has shown that it is important for the regulator to be able to take action quickly to minimise losses to depositors and other creditors, and to maintain stability in the entire financial system. The Bill will accord MAS a wider role in the resolution

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process and a broader range of resolution options.

More specifically, the new section 54A provides MAS the right to be heard in insolvency proceedings of a bank and the power to approve the appointed liquidator. Part VIIA introduced by the Bill also empowers MAS, with the approval of the Minister in charge of MAS, to direct the sale of the business of a bank and in the case of a bank incorporated in Singapore, to require the issuance of new shares, to restructure the share capital or to sell existing shares to other investors. Before it can exercise these powers, MAS has to consider the interests of depositors of both the transferor and transferee, as well as the stability of the financial system in Singapore. The affected parties will be given a right to be heard prior to the Minister’s approval of such a transfer, except where it is not practicable or desirable to do so, for instance, where an expeditious transfer is crucial in maintaining financial system stability.

Facilitating risk-based supervision and allowing operational flexibility of banks

Let me now turn to how the amendments will facilitate risk-based supervision and allowing operational flexibility of our banks. Consistent with the risk-based supervisory approach

adopted by MAS, the Bill will allow the calibration of prudential requirements according to an individual bank's financial strength, its risk profile and its risk management capabilities. Let me provide a few examples. The revised section 29 allows MAS to raise the large exposure limits for individual banks where there are strong justifications. Under section 40, a higher asset maintenance requirement may be imposed on banks that pose greater supervisory concerns. The amended section 38 will allow banks the operational flexibility to draw down their liquidity reserves to deal with liquidity stress situations. In addition, in view of

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the industry's need to move nimbly in a fast-paced environment, the new section 76A will allow MAS to grant exemptions from requirements in the Act in specific situations where the prudential objectives are not compromised.

Under the current regime, only banks and non-bank financial institutions are subject to MAS' rules on the issuance of credit cards. The new Part VIII extends MAS' regulatory scope to all issuers targeting the Singapore market and not just banks and financial institutions. Entities that have not been approved to issue credit cards in Singapore will be prohibited from soliciting for or accepting card applications in Singapore, and this applies equally to third parties acting on their behalf. MAS will be empowered to inspect the operations of approved credit card issuers for compliance with MAS’ rules pertaining to credit card operations.

The proposed regime also clarifies that single party merchant credit is exempted from regulation. Such an arrangement, where the card is really used only for transactions with the issuer, is essentially a deferred payment scheme offered by merchants to their customers. In addition, a new exemption for cards granting credit in small amounts not exceeding $500 will be introduced. This allows flexibility in payments for small-ticket items without raising substantial concerns about Singaporeans spending beyond their means.

Let me now turn to the other amendments that are needed to update the banking regulatory framework:

(a) Section 22, which requires a bank to maintain a reserve fund. This will be repealed in light of enhancements to MAS' regulatory framework over the years, and the banks will be allowed to release their reserves over a five-year period.

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(b) Section 5, which restricts the use of the word "bank" to protect consumers from being misled as to the status of the entity they are dealing with, will be amended to accommodate legitimate uses of the word, such as representative offices of foreign banks; international financial institutions like the World Bank, Asian Development Bank; and where it is used in a non-financial sense, such as "Blood Bank" and "Infobank".

(c) The amendment to section 4B will provide flexibility for MAS to exclude or include any financial product from or in the definition of "deposit". This is necessary to facilitate MAS’ response to innovative products that either legally satisfy the definition of "deposit" but do not meet the economic characteristics of a deposit, or conversely meet the economic characteristics of a deposit but do not satisfy the legal definition of "deposit". An example of the latter is a murabaha investment - an Islamic variant of a time deposit. Products that are prescribed as deposits will be accorded priority ranking in the event of a bank winding-up and protection under the deposit insurance scheme.

(d) The amendments to section 26 will permit MAS to disclose only non-customer information provided by banks to MAS under limited circumstances, such as for the purpose of sharing aggregate information at international fora and contributing to research projects. This is to balance MAS' responsibility for surveillance and supervision of the financial sector with its commitment to preserve the confidentiality of individual banks' information.

(e) To underscore the importance of accurate reporting of information to MAS, section 66 will be amended to extend the obligation - currently imposed on directors and executive officers - to any

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person who furnishes information to MAS to exercise due care in ensuring that the information is not false or misleading.

(f) Finally, the new section 54B will explicitly provide MAS with the powers to direct the removal of directors from the board of a Singapore-incorporated bank, if these persons fail to perform their duties and functions, to protect public interest and depositors. This is in line with international standards and the practices in reputable jurisdictions.

Conclusion

Mr Speaker, Sir, a sound and vibrant financial sector is an integral part of ensuring the success and resilience of the Singapore economy. These amendments to the Banking Act are part of an on-going process to enhance the robustness and responsiveness of our banking regulatory framework, in tandem with the growth in scope and sophistication of the activities of the banks in Singapore.

Sir, I beg to move.

Question proposed.

3.37 pm

Mr Inderjit Singh: Mr Speaker, Sir, I support the proposed amendments in the Bill. The Bill is definitely a step in the right direction when we consider Singapore's efforts to become a major world financial centre. I have comments on six areas of the proposed amendments to the Banking Act, as follows:

The first comment is on section 4B. The Bill proposes widening the possible definition of "deposit" in section 4B. This is a positive development and I welcome it. Sir, there is a trend of capital movement from the west to the east, particularly from the Middle East. We need to be ready for this expected surge in capital, including that from the Arab

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world, where many are owners of the capital.

I hope that the banks will take up the challenge to devise new, Syariah -compliant financial instruments, including deposits, that will give these owners options to invest their capital here. Additionally, Islamic banking instruments may also appeal to a wider population, as has been experienced elsewhere.

I would say that we may even need to go further because now is the right time for Singapore to position itself as the key centre outside the Arab world for Islamic banking. I was hoping to see more done to make Islamic banking a reality in Singapore. MAS therefore should form a focus Committee or workgroup to seriously develop Islamic banking options in Singapore.

Sir, however, the widening definition of "deposit" may catch some consumers unaware as they may view some products as principal-guaranteed when they may involve hidden risks or costs. What restrictions exist or are proposed to prevent the introduction and marketing of such products and, in particular, of them being labelled as straightforward "deposits"?

The second comment is on section 22 which is the abolishment of the reserve fund. I would like to ask the Minister how the reserve fund is presently maintained and whether the repeal of the requirement is expected to lead to an outflow of capital from Singapore. If so, will this not lead to excess supply of Singapore dollars on the market and lead to a risk of fluctuation in the currency value? Especially at a time when the US dollar is in a trough, it may not be wise to risk any fluctuation that we can avoid.

Sir, the third comment is on the prudential safeguards on the proposed amendments to sections 27 to 29 of the

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Act, I note that these amendments will likely involve some dislocation of certain parties, but that it will make for a stronger industry as a whole where the risks are acceptably spread out by the banks. This will also benefit consumers by giving them greater assurance of the stability of the banks where they entrust their money to. I welcome, in particular, the shift to an exposure-based regime of disclosure. What this change means is that banks that have large exposure to groups of related entities will have to scale back on this exposure.

Further, in the case of DBS Bank, which has large exposure to Government-linked companies (GLCs) in terms of supporting their financing requirements, I think that the proposed amendments will provide an impetus for a few things:

First of all, DBS will have to source elsewhere for business that it may have to forgo as a result of the Bill. This is a good opportunity for them to exploit other markets. Hopefully, it will also make DBS (and other such banks) more open to innovative funding arrangements, especially funding more SMEs.

GLCs will also have to source funding on market-driven principles, having to satisfy lenders not linked to the Government that they are viable credit risks.

Specifically, could the Minister enlighten us as to whether Temasek, which is a core part of Singapore's investment strategy, will face any significant challenges because of the proposed amendments since many of its related entities bank with DBS and Temasek also owns DBS?

Sir, MAS' ability to exempt certain banks or categories of banks from operation of these limits in its prudential safeguards, which is in section 29(3), is potentially sensitive, especially if it works

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in favour of local banks. I suggest that this be taken into consideration before any exemptions are made, which must be well-considered and judiciously made.

As regards the disclosure requirement itself in section 27(1) of the Act as proposed, it would require a statement on exposure by banks in Singapore. Checking on this looks like a difficult task for MAS. In the case of foreign banks, their exposure may be spread wider geographically than local banks. Has the feasibility of checking on compliance been considered by the Minister and MAS?

Further, some of this disclosure may involve clearance from regulatory authorities overseas due to their banking secrecy Act, for example, in the case of disclosures that involve exposure to banks or customers of banks overseas.

Finally, local banks are required to include their Asian Currency Units (ACUs) exposure in their calculations while foreign banks operating ACUs are presently exempted from this by reason of the transitional provision in clause 67(9) of the Bill. There may be a disproportionate impact on the numbers reported by local banks because of this. I hope that we are not unwittingly imposing more difficult conditions on local banks that would favour foreign banks.

The fourth comment is on sections 38 to 40, which are on the asset maintenance regime. I would like to seek some clarifications from the Minister.

Sir, on the proposed amendment to section 38 which concerns minimum liquid assets, the Bill contains new powers for MAS to deal with banks in relation to a minimum liquidity required, especially for liquidity stress situations. This is, of course, good for the consumers.

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The Bill, however, also changes the period for altering the minimum liquidity to three days, instead of the previous one month, under section 38(3). MAS has clarified that, in practice, it will continue to act in consultation with industry, and the three-day period for altering the minimum liquidity will only be used exceptionally. If this is the case, why is there a need to reduce the statutory period for compliance to three days? Why not instead stick with a longer limit, while providing for a shorter limit to be no less than three days?

Sir, the three-day limit in the provision could seem very onerous for financial institutions. Hence, it may work against the long-term aim of making Singapore a financial hub. I therefore suggest that a ministerial check be written in as a safeguard for invoking this minimum period which means that we should not do it at the very first instance. Can this check be introduced in the Act?

In section 39 as proposed, and this concerns minimum cash balances, this provides flexibility to MAS to deal with different banks differently. In my opinion, this is also a good idea.

Also, the financial penalty provided for in section 39(7) should be provided for in the Act itself instead of being left to subsidiary legislation. Is there a good reason why it is removed from this Act?

Sir, in section 40, which covers the asset maintenance requirements and the related sections 49 to 55, which concern certain powers of MAS, could the Minister please enlighten the House on how other major financial centres handle such asset maintenance?

Sir, even the best of regulations cannot totally rule out flight risk of capital when banks are in stress. What is the experience of other jurisdictions in reducing flight risk of capital on impending

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insolvency and how can the chances be minimised in Singapore? What are the lessons learnt from other areas?

As regards the powers of MAS to step in and manage the affairs of banks in or approaching insolvency, what is the role of MAS when it moves in to control a bank as provided for in this Act? What are its objectives when it takes over the running of the operations of such an insolvent bank? Will the current insolvency procedures, applicable for all companies, not be sufficient? Why the need for these additional changes?

Sir, my fifth comment is on section 62, which concerns the priority ranking of depositors. The proposal to put non-bank depositors ahead of bank depositors is a welcome move as it will provide protection to the less sophisticated depositors. Could the Minister clarify whether it is expected that there may be a move by some banks to concentrate their deposits in other banks that do not accept significant deposits from non-bank depositors? This is so that they can avoid being pushed back in the queue.

The sixth comment is on sections 57 to 57G which are on credit cards and credit. This is a welcome move and we have seen many of our residents, who have been in this downward spiral of debt. In extreme cases, people borrow from one credit card company using one facility to service debt taken from another facility at a very punishing interest rate. They quickly run out of options and face a mountain of debt and also bankruptcy.

I therefore welcome the tightening of the rules that control credit card issuance and the extension of credit. Sir, I have a few questions for the Minister.

First of all, the proposed section 57(3) would catch advertisers, especially since section 57(8)(c) (not knowing that advertisement would breach the law) is

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difficult to apply, in my opinion. Can this be revoked to provide effective protection for advertising agencies when they have to apply this?

In section 57D(1), this gives the power to issue directions but subsection 4 provides for high fines for violations. Subsection (2) also provides that the directions are not subsidiary legislation. The combined effect of sections 57D(2) and (4) blurs the line between subsidiary legislation and directions. For subsidiary legislation, there is an obligation to publish it in the Gazette , so we cannot say that ignorance of the law is no excuse. Is it not more appropriate to have the directions instead published as subsidiary legislation?

As regards section 57E, there is no provision for informing the public upon revocation of a licence. There is also no requirement for a licensee whose licence is revoked to notify at least their ex-customers. Further, subsection (2), requiring the licensee to prevent the use of cards after the licence is revoked, is likely to be practically unworkable and may be difficult to comply with. Subsection 3, while preserving transactions that took place before revocation, says nothing about transactions that took place after revocation. There is potential impact on third parties that has to be addressed. Can this section, therefore, be revoked to take this situation into account?

What is the Government's policy on mass-providers of credit to lower income groups that are usually targeted with credit cards (ie, those earning income below $30,000)? For example, we have seen extensive advertising over the last year of lending of smaller amounts by a commercial credit provider that is not subject to the Banking Act. Advertisements for such credit are plastered all over MRT stations, taxis, among other places. Will this likely affect the market

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estimates on the credit and default and indebtedness problems arising from over-borrowing?

Do we want the Banking Act to be the only legislation governing mass-providers of credit? If so, what other changes would be necessary to other legislation, for example, the Moneylenders Act (Cap. 188)? Can we bring both of these Acts, or at least the institutions licensed under them, under the same monitoring agency to provide for better control of their activities? So, credit card debt is, therefore, not the only problem. It is the other type of debt that may exist.

Sir, in conclusion, this being a very technical Bill which is difficult to understand, but I managed to understand most of it, I hope that the Minister can clarify the points I have raised. But, overall, I think this is a good Bill and I support the amendments.

3.46 pm

Mdm Ho Geok Choo: Mr Speaker, Sir, the amendments are comprehensive and will empower MAS to better manage the new dynamics of the banking sector in the years to come.

I have only one comment on the Bill. This relates to credit card advertisements and promotions by banks, section 56, subsection 5 (page 68).

How do Net advertisements or solicitations come under this section, if a foreign bank originates it outside Singapore but intended for a Singapore audience, or as part of a regional marketing exercise of which Singapore is one target market?

Sir, the Internet is still very much a grey area that transcends territoriality. Is it possible to develop more granular controls on Net advertisements and promotions?

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Sir, I also have a number of other issues to raise relating to the development of the banking sector in Singapore. Unlike Mr Inderjit who has digested the technicalities, I am raising another perspective.

The first relates to developments in credit card technology.

Sir, we have seen recent cases of credit card skimming and credit card fraud perpetrated by foreigners, precisely because we use magnetic-striped cards. The continued targeting of Singapore by these fraudsters may undermine our reputation as a trusted financial hub. On the other hand, credit cards with embedded microchips have reduced card fraud by as much as 80% in countries like France.

Under these circumstances, I would like to ask if MAS would mandate the adoption of EMV microchip technology to replace magnetic stripe-based cards. I understand this may be a costly exercise for banks. But I would like to argue that the cost is worth our reputation as a trusted financial hub, as well as for the reputation of the banks themselves.

My second question concerns two-factor authentication. MAS has mandated that local banks adopt two-factor authentication (2FA) to provide stronger security for e-banking. But feedback by bank customers indicates that it may be inconvenient for them to carry multiple tokens for different bank accounts. I would like to ask if there is a better alternative that provides more convenience but does not sacrifice the added security.

Sir, my next question is about phishing or anti-phishing. Phishing is becoming more rampant around the world. Security experts tell us that phishing attempts are moving away from the USA and Europe to the Far East. Singapore banks have also

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been the targets of phishing attacks in the past. One reason why phishing continues unabated is because phishing sites are often located in servers in third countries where banking laws are not so strict. Many security experts believe the answer lies in more effective inter-governmental collaboration.

In view of this, I would like to ask: What are the prospects for increased inter-governmental cooperation in combating phishing? What are the prospects and challenges for a global or inter-governmental agreement in combating phishing and similar crimes?

Sir, one issue that crops up regularly among SMEs is the need for a SME Bank. As business organisations, banks naturally gravitate towards higher-yield activities. This, coupled with more stringent banking controls, may make financing for SMEs less attractive. SMEs, on the other hand, need a good source of funding to help them grow and regionalise. According to the 2006 SME Development Survey, a good 40% of SMEs depend on overdrafts as their main source of short-term funding. This is an expensive option for them.

While the situation has improved slightly in the past three years, the financing structure for SMEs has not changed at all. Overdrafts remain their main source of short-term funding (40%), followed by trade financing (32%), term loans (27%) and factoring (7%).

Sir, less than one in three SMEs (27%) are able to secure loans to finance their growth. Clearly, this structure needs to be corrected. Can MAS look into the feasibility of an SME Bank to assist SMEs finance their growth and to go regional? The SME Bank can provide a wide range of financing options designed for SMEs and on more competitive terms. This will, in turn, help our SMEs to become more

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competitive in their markets. The SME Bank can also provide first- or second-round funding for start-up companies, thus supporting our drive towards greater entrepreneurship.

Sir, I believe such a bank can be viable financially. More importantly, it can provide the much-needed impetus to help our SMEs grow and expand regionally.

Sir, my final comment relates to the marketing of financial products. We all know that banks do not make much money by accepting deposits. They do make money by selling their depositors additional products such as unit trusts, insurance policies or structured deposits. In the case of structured deposits or investment products, customers are not made aware of the many and often substantial hidden costs in these products. While they are promised protection of their principal sums, many of the management costs of these products are often deducted upfront. So, in cases where the returns on these products are minimal, depositors may actually lose part of their principal.

In light of this, banks must demonstrate greater transparency by advising their customers of the hidden costs of these products. A related area of concern is the way banks target specific customers who have deposits of a certain size. This clearly violates the privacy of the customer. Banks have obviously made use of privileged customer information to target their customers for cross-selling. Do customers have any safeguards to protect their information? MAS should mandate that banks do not use confidential customer information for any other purpose than normal transaction and communications.

MAS can also require banks to put up prominent warning labels to alert customers that there are risks attached to

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these ‘safe’ investments. This is similar to the warning labels put on cigarette packs.

Sir, I believe these are major issues that will require the attention of MAS to further strengthen Singapore’s position as a trusted financial hub and banking centre.

Sir, on these, I rise in support of the Bill.

Mr Lim Hng Kiang: Mr Speaker, Sir, I thank both Mr Inderjit Singh and Mdm Ho Geok Choo, who obviously have mastered the amendments very comprehensively and have suggested many comments and improvements. I believe Mr Inderjit Singh raised six points and Mdm Ho raised four. So there are 10 points altogether. I hope Members would bear with me as I go through these points.

First, Mr Inderjit Singh talked about Middle-Eastern funds and the definition of deposits. I agree with Mr Inderjit Singh that we have to deepen our engagement with the Middle East and attract Middle-Eastern funds into Singapore. Our aim is not so much to become a centre for Islamic finance but to build upon our existing strength as an international financial centre. In this regard, we are working with the industry to ensure we have a full suite of financial products and services, including Islamic products and services. We have been reviewing our legislative framework to ensure what we have is conducive to all these new Islamic financial products. Our approach has also been to level the playing field, ensure the neutrality of rules so that anybody coming up with innovative Islamic financial products will not find that they are operating against regulations which are not in their favour. So the neutrality of rules will therefore apply to both conventional and Islamic products and services wherever possible.

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Mr Inderjit Singh suggested a Committee to address this. I think this is a good point. In fact, MAS has been working with industry players to tap the views of all the players as to how to develop their products and to make sure we are able to engage the Middle East and to be a player in Islamic finance. So I agree that MAS will continue to deepen its engagement with the industry players.

On the issue of definition of deposits, I recognise that consumers sometimes may be confused whether what they are buying into or what they put into is essentially a deposit or not. That is the reason why we have some of these amendments. Let me clarify that we are not widening the definition or the scope of a deposit. What we are seeking to amend the Act is to allow the MAS to recognise certain products that meet the economic substance of a deposit, ie, that the principal is guaranteed but does not quite satisfy the legal definition of a deposit. Some of these products relate to the Islamic financial products. By clarifying the definition, I think it makes it better for us.

When Mr Inderjit Singh refers to complex deposits, I suppose he is probably referring to structured deposits. Some of these products are advertised as deposits but they have features which require you to take a risk on your deposits. All structured deposits are, in fact, currently subject to higher product disclosure requirements, as set out in the Financial Advisers Act. These are the guidelines on structured deposits. This is to ensure that people who buy into such products know what they are buying into and they know that this is not a straightforward deposit.

The second point which Mr Inderjit Singh raised is the outflow from the reserve fund and its impact on the Singapore dollar and the flow of funds out of Singapore. Let me explain that the

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reserve fund is essentially the retained earnings that belong to the shareholders. This has been kept under section 22, and this was intended to raise the reserve requirements for the banks

as they build up their reserve requirements. Under section 22 previously, the banks were not allowed to distribute to their shareholders. There is now no longer this requirement to maintain the reserve fund and in fact we do not require the fund to be maintained in any particular form of asset. So with the repeal of section 22, and we allow this to be done over five years, we do not foresee any difficulties that Mr Inderjit Singh pointed out that there will be this huge outflow of funds affecting the Singapore dollar.

The next area that Mr Inderjit Singh raised is regarding the prudential safeguards, particularly the large exposure limits. Let me assure the House and Mr Inderjit Singh that MAS has conducted several consultations with the industry on the revised framework and we do not expect the banks to have any significant difficulty complying with these new rules. But, nevertheless, we still have a two-year transition period for the banks to modify their systems and to make the necessary preparations.

Mr Inderjit Singh asked whether the exemptions are necessary. Essentially, we need to strike a balance between setting out the requirements in a very transparent and stringent manner as well as giving MAS the flexibility to deal with the situation as it arises. So it is this flexibility that MAS needs. Especially in situations of restructuring or in a resolution of a bank failure, MAS needs some of these exemptions to give it the flexibility.

Mr Inderjit Singh cautioned that MAS' use of such exemption powers may be seen to be based on MAS own requirements and may not be seen to be

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transparent. So I think we have to strike a balance. Let me assure Mr Inderjit Singh that the exemption power does not relieve MAS of its duty to ensure that when it exercises such powers, it exercises it on good defensible grounds and where there are strong prudential justifications.

Mr Inderjit Singh also asked about the regulation of foreign banks and how the exemption of exposures booked in the ACU of a bank incorporated outside Singapore would present problems with us. We have to work closely with our counterparts in other jurisdictions, just as we regulate or supervise the branches of foreign banks here. Similarly, our counterparts in other countries would also supervise or regulate the branches of Singapore banks. This close regulation and cooperation between regulators will allow us to make sure that the regulations cover across borders.

The fourth area is the minimum liquid asset and the asset maintenance requirements. Basically, what we are confronted here with is the problem of maintaining liquidity when there is a stress on the banks. Liquidity risk is a critical risk for the banks and, in normal circumstances, of course, the liquidity requirements of a bank for its day-to-day operations can be reasonably anticipated, and the MAS has no reason to make any sudden changes to the minimum liquidity requirements. The three-day grace period that we are seeking for really only addresses when there is severe adverse liquidity position of a bank. We will only impose this after careful assessment of the situation. A bank which has insufficient liquidity to make its claims can very quickly accelerate into a crisis of confidence and bring down the bank. And if the MAS is prevented from acting promptly to deal with such stress situation and such crisis, then it can be even more damaging for Singapore's reputation as a financial centre.

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On the issue of minimum cash balances, again, this is the need to balance flexibility and transparency. Again, when we made the changes of an imposed requirement, this will be put up as a subsidiary legislation and which will be gazetted when we notify the banks.

On the asset maintenance requirements, Mr Inderjit Singh asked what were the practices in other countries. Let me assure him that asset maintenance is in fact one of the prudential tools which enhance the protection of depositors and this is a practice which is commonly done in other jurisdictions. Basically, if a branch of a foreign bank faces problems, we want to be able to circle some of the assets they have here so that its assets can be protected and to pay the local depositors. Other jurisdictions in fact go further and require the bank to incorporate locally before they can accept retail deposits. So, in fact, the regime that we have here is fairly liberal. We allow the foreign banks to set up branches here, but we do want to introduce this new asset maintenance regime in order to be able to protect our depositors.

The fifth area is the priority ranking of depositors and Mr Inderjit Singh asked whether, with such a situation, banks would game and go for a situation where the inter-bank deposits will rank higher. I think this is a possibility. But I am sure when banks undertake activities with their counter parties, they do not just take this as a key consideration. Before entering into any transaction, I am sure the principal consideration of the bank is the creditworthiness of its counter parties, and not the ranking of its inter-bank deposits.

The sixth area is the credit card regime. Mr Inderjit Singh welcomes the tightening of the rules. But at the same

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time, he wonders whether we should have a single entity to regulate all the credit. I think we do want to prevent Singaporeans getting themselves into situations where, as Mr Inderjit Singh mentioned, they borrow money to pay earlier credit problems or loans and, as a result, they end up spiralling into a situation where it is very difficult for them to get out. At the same time, we cannot be overly stringent. If we cut off the limits on credit card applications too stringently and we prevent avenues for lower-income Singaporeans to borrow through, say, for example, the Moneylenders Act, then they have nowhere to go and they will probably end up with the loansharks. So this is where we have to strike a balance. Indeed, this is what we have done between the Ministry of Law which oversees the Moneylenders Act and MAS which oversees the Banking Act. You have noticed in recent months that we have coordinated the policies so that we have a consistent regulatory framework with regard to credit borrowing from Singaporeans.

Let me now turn to the four issues raised by Mdm Ho Geok Choo. The first issue is on SME financing and her suggestion of a SME bank. I think we have addressed this just now in a Question for Oral Answer. We have quite a wide range of avenues for SMEs to have access to financing, whether through trade financing, term loans, factoring, or through Government assistance, LEFS scheme and many other schemes, which I mentioned just now. We will continue to evolve and provide more opportunities. Right now, many banks in fact regard SME financing as an area of growth that they will be focusing on. I know of many banks who see that by developing the SME sector in Singapore as a template for which they can bring the business model to the regional countries and it is a way of expanding their business. So it is not true that the banks see the SME as a sector

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for which there are no good business prospects.

MAS will continue to welcome initiatives by the financial institutions to provide new financing options for the SMEs. For example, we have seen some initiatives put up to allow the SMEs to tap the capital markets and also to assess credit applications based on cashflow analysis, and not just simply on collateral. Let me also stress that MAS continues to be open to admitting financial institutions with specialised expertise in SME financing, so long as they are financially sound and meet our prudential standards. Some players in foreign markets who specialise in SME financing do not take deposits. In such instances, they will not require a banking licence from the MAS. There are a few of such players in Singapore already who are funded primarily in the capital market and which provides equipment leasing, factoring and other working capital loans to our SMEs.

Mdm Ho asked about the technology risks and whether our credit card technology can be updated to prevent fraud. On the whole issue of the appropriate technology to apply in credit cards, MAS' position is to leave it largely to the private sector. They are in the best position to decide for themselves. Let me tell the House that from the annual statistics that MAS has been collecting from the banks in Singapore on credit card fraud, in fact, credit card fraud losses have fallen significantly in the past few years. Between 2002 and 2005, credit card fraud losses have fallen by more than 50%, from $9.7 million to $4.5 million. So MAS does not see this as a very big problem. But, nevertheless, we will continue to monitor it and we will continue to encourage the credit card providers to adopt the right technology to prevent credit card fraud. They have to balance the likely losses from the fraud with the cost to be incurred in introducing new or very difficult technologies.

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Mdm Ho also asked about the disclosure of product information. It is true that some of the banks are very aggressive in cross selling. For this, we have the Financial Advisers Act which regulates such cross selling and the market conduct of such cross selling. Under the Financial Advisers Act, all material information related to the product must be provided to the clients and such information disclosed must be clear, adequate and not false or misleading. So the rules are there and MAS will continue to enforce these rules. There are also similar rules, as I mentioned just now, on structured deposits which sometimes Singaporeans find difficulty in understanding the risks which they are undertaking in taking up these products.

Mdm Ho Geok Choo talked about advertisements on the Net. Basically, our approach to advertising on the Net for credit card is that if the advertising is targeted at Singaporeans, then it will come under the rules. I think that is the guiding principle.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [Mr Lim Hng Kiang].

Bill considered in Committee.

Mr Lim Hng Kiang:

The Chairman: The citation year "2006" will be changed to "2007", as indicated in the Order Paper Supplement.

Clauses 1 to 67 inclusive ordered to stand part of the Bill.

Bill reported without amendment; read a Third time and passed.