BANKING (AMENDMENT) BILL

Order for Second Reading read. 3.15 pm

The First Deputy Prime Minister and Minister of Education (Dr Goh Keng Swee): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

Since the introduction of the Banking Act in 1971, Singapore has developed into a financial centre of international importance. This is demonstrated by the presence here of a large number of financial institutions of international standing and reputation, the advent of new financial instruments, the rapid development of the Asian Dollar Market, the extensive nature of the financial transactions that are entered into and the numerous financial services that are now being provided. The liberalization of exchange controls and the development of the capital market have also played their part in making the banking scene in Singapore vastly different from what it was at the time of the passing of the Banking Act.

In the last three years, 1981 to 1983, the contribution of the financial sector to our GNP was large, $1.6 billion, $1.8 billion and $2.1 billion respectively. Growth rates registered were 25.0%, 16.7% and 14.3%. These growth rates were exceeded only by Construction. As on June 1983, the industry employed 38,268 persons, mostly in well-paid occupations.

It is, then, hardly surprising that these developments have had a considerable impact on the effectiveness of the existing Act to deal with the many changes that have occurred since 1971. Some of the concepts in the existing Act have to some extent become outdated, other concepts are in need of refinement to meet rapidly changing financial conditions. Thus the decision was taken to conduct a comprehensive review of the provisions of the existing Act to make it a more efficient and flexible instrument for regulating the industry in the long term interests of both the banks and their depositors and other creditors. It is against this background that the proposals in the Bill now before hon. Members should be viewed.

The Banking Act provides for the organization, structuring, control and supervision of banks in general. The control and supervision of banks is, as Members know, the responsibility of the Monetary Authority of Singapore. It is well recognized that the supervision of banks is a difficult and often complex operation. Too lax a supervision can lead to abuse and fraud; too strict will stifle growth and enterprise.

Since there is no perfect form of supervision, there must be a constant striving to make this form of control as effective as possible, without overdoing it. A wise Mandarin of the ancient Chinese Imperial Civil Service said that governing a country is like frying small fish. It must not be overdone. This dictum applies to bank supervision, for there are limits to what it can achieve. It cannot, of course, ensure that banks will not make loans or investments that turn out to be bad. The responsibility for making loans and investments must rest squarely on the heads of the directors of banks and that is why it is so important that directors should be persons of integrity and competence who exercise great care and skill in controlling their loans and investment business. A mere examination of returns of banks by the Authority can be no substitute for proper internal control by bank managements.

With these introductory comments, I will now deal with the main provisions in the Bill.

The proposals in the Bill, in general terms, will:-

i) improve supervisory powers of MAS over banks;

ii) ensure that control of domestic banks would not pass into undesirable hands;

iii) set limits of credit facilities that a bank may grant to its customers;

iv) enable the Authority to have stricter control over the audit of banks;

v) rectify the anomaly in the provision for priority of deposit liabilities by giving deposit liabilities that have been subject to prudential requirements prior claim; and

vi) replace the existing administrative control over the operation of an Asian Currency Unit by statutory provision.

The first major group of amendments that are proposed in this Bill is concerned with the passing of control of domestic banks to other persons. These appear in clause 5 of the Bill which introduces new sections 14A, B, C and D. These amendments would enable the Authority in relation to a bank that is incorporated in Singapore to control -

a) a take-over of such a bank by the intended acquisition of not less than 20% of its shares;

b) arrangements by which outside persons would be able to determine the policy of such a bank; and

c) the acquisition of substantial holdings, that is, interests in 5% of the voting shares of such a bank.

The purpose of these amendments is to ensure that domestic banks, which form a key sector in the economy, should not pass into undesirable hands. The proposals do not prevent, it will be noted, a take-over by acquisition of shares or the acquisition of substantial holdings in domestic banks but they do seek to ensure that the Authority will be in a position to decide whether the potential new controller or substantive shareholder, as the case may be, is a suitable person to be exercising control or to be having a substantial shareholding in a domestic bank. The proposals will only apply to persons seeking to obtain control of or have substantial holdings in a domestic bank after the coming into force of this proposed legislation. They do not affect past changes of control or past acquisitions of substantial shareholdings. The provisions in new sections 14A and 14B that deal with potential changes of control of domestic banks are, it will be noted, widely drafted so as to embrace not only situations where a person is acting alone to obtain control but also where he is acting in concert with associates.

The amendment proposed by the new section 14D would enable the Authority to obtain from a bank that is incorporated in Singapore information as to the beneficial ownership of shares in that bank. This proposal is closely linked to the function of the Authority in exercising control over take-overs and substantial shareholders for it will enable the Authority to ascertain the ownership of shares held, for example, in nominee names and thus make it more difficult for persons to place themselves in a position so as to obtain control of a domestic bank through such nominees.

The second group of amendments is concerned with the need to ensure that banks in their lending or investment activities conduct their business in a prudential manner and thus avoid over-committing their financial resources. Accordingly, the amendment proposed to section 25 would have the following effect of:-

a) changing the existing limit in which a bank may grant credit facilities to a single customer or group of connected customers by lowering the aggregate percentage from an amount in excess of 60% of the capital funds of the bank to 30% of those funds; and

b) limiting substantial loans to an aggregate amount which does not exceed 50% of its total credit facilities.

A substantial loan means, in general terms, a credit facility granted to a single customer or group of connected customers which in the aggregate exceeds 15% of the bank's capital funds.

These amendments are designed to promote prudential banking and at the same time take into account that the capital bases of all the domestic banks have grown very substantially since the original 60% limit was fixed in 1971. The total capital funds of domestic banks have increased more than 11 times, from S$325 million to S$3,849 million during the period 1971 to 1982. The lower limit of 30% should therefore not interfere with participation by banks in major loan projects or interfere with their competitiveness in their domestic and international business. The limitation on the granting of substantial loans is to ensure that banks do not concentrate their commitments too much by lending only to a few big customers and thus increasing their risk exposure. In other words, it discourages them from putting too many of their eggs in one basket.

Clause 8 which introduces a new section 27A has much the same objective in mind. This provision, however, is designed to exercise a measure of control over banks which seek to diversify, for example, into commercial or industrial undertakings to an undesirable extent. Accordingly, it provides that banks shall not enter into agreements to acquire interests of 20% or more in any company, whether incorporated in Singapore or not, without the approval of the Authority. This provision would not apply, however, to a bank's acquisition of such assets in satisfaction of debts due to it so long as, upon making the acquisition, the bank obtains the approval of the Authority to retain these assets as an investment.

To ensure that the prudential limits of section 25 and other sections of the Act dealing, in particular, with the lending and investment activities of banks are not circumvented by the use of subsidiaries or related companies, the Authority may require a bank to aggregate its assets, liabilities or profits, as the case may be, with those of any of such subsidiaries or other related companies. This will enable the Authority to exercise prudential supervision on a group basis. This provision is in line with the practice in Switzerland, and the German bank regulators are contemplating a similar policy.

I now move on to the amendments that are proposed to section 42 which provides for banking secrecy. These proposed amendments have been found by experience in administering the Act to be necessary to relieve the existing rigidity in section 42(3) which deals with the requirement of maintaining banking secrecy. In the main, they are intended to extend the existing exceptions to banking secrecy to cover civil proceedings arising between a bank and the guarantor of a customer or where the bank has been served with a garnishee order attaching monies in the account of a customer or where the information to be disclosed relates to credit facilities granted by a bank incorporated outside Singapore and the information is required by its head office for supervisory purposes. However, other amendments are intended to tighten up the existing exceptions to banking secrecy. The exception that enables a bank to give information about the credit worthiness of a customer has been restricted to the giving of information which is of a general character and not related to details of a customer's account. Again, the exception in section 42(4)(a) providing for a customer of a bank to give permission for disclosure of his bank affairs may be interpreted as meaning that the customer's oral permission is sufficient. The amendment will now make clear that he has to give his written permission.

The Bill proposes new provisions in clause 11 in relation to audits of banks. The new provision will enable the Authority to, in addition to the duties at present imposed on an auditor and largely dictated only by the Companies Act (Cap. 185), call upon the auditor to extend the scope of his audit to give additional information, to carry out other examinations, and to submit a report to the Authority on the results of his work. In addition, the Authority must also be immediately informed if the auditor in the course of his audit discovers serious offences or major losses or serious irregularities that jeopardize the security of creditors or that claims of creditors are not covered by the bank's assets.

Equally important, the conditions that the Authority will lay down for an audit will ensure that the auditor is entirely independent of the bank which he is going to audit. Furthermore, the Authority can insist that a much more rigorous and searching audit is conducted, These amendments, when implemented, should result in external auditors of banks playing a greater role than hitherto in supporting the Authority in the discharge of its supervisory functions over banks. They are clearly designed to give greater protection to depositors and creditors of banks and minimize the likelihood of fraud and other crimes of dishonesty being perpetrated or going undetected. These provisions are based on existing practices of bank regulatory authorities in Germany and Switzerland.

The next major amendments to which I would like to draw the attention of Members appear in clauses 13 and 14 of the Bill. These amendments are concerned with the priority of deposit liabilities in the event of a winding up of a bank that is insolvent or is unable to meet its obligations. Clause 13, which amends section 56, provides that the deposit liabilities of a bank shall have priority over all other unsecured liabilities other than those specified in section 292(1) of the Companies Act. The existing section 56 is far too wide-ranging for it could be construed as giving priority over secured debts and over the preferential unsecured debts that are spelt out in section 292(1). The effect of the amendment is, therefore, that in a winding up, though the claims of the depositors of a bank will rank after the claims of, for example, the liquidator for his costs in the winding up, employees of a bank for their wages, and the tax authorities for taxes owed by a bank, their claims will rank above those of the ordinary creditors of a bank. This question of priority of debts, it should be stressed, is only of importance if the assets of a bank are not sufficient to meet the claims of the creditors of a bank.

Clause 14 inserts a new section 56A which provides that amongst the depositors themselves some depositors will have a higher priority ranking in a winding-up than other depositors. Thus first preference will be given to non-bank customers of a bank if the deposit liabilities of the bank are included in the computation of the reserve and liquidity requirements in sections 34 and 35.

The second preference will be given to interbank deposit liabilities if they are included in the abovementioned reserve and liquidity requirements. The third preference will be given to deposit liabilities with non-bank customers where the deposit liabilities are not included in the reserve and liquidity requirements. This, as I have explained earlier, will ensure that deposits that have been subjected to stricter prudential requirements be given priority of claim accordingly.

The new section 56B is designed to facilitate the winding up of a bank caused by the liquidator by notice to require every debtor of a bank to redeem any securities he has deposited with a bank within three months of the date of the notice.

Finally, as Members may know, foreign and domestic financial institutions have been operating the Asian Currency Units for many years. The operators of these Asian Currency Units know that though they are subject to the provisions of the Act but, depending on their status as companies incorporated in Singapore or outside Singapore, they have been, under administrative arrangements with the Authority, exempted from certain provisions of the Act. These exemptions have been an integral part of our efforts in developing our offshore market. The purpose of clause 15 is to put these administrative arrangements on a statutory basis. Subsection (4) of new section 69A now expressly lays down the sections of the Act from which persons operating the Asian Currency Unit will be exempted. Such exemptions from regulatory and other requirements are a general practice in the off-shore banking business.

The other amendments made by the Bill do not warrant any special mention in addition to what has been stated in reference to them in the Explanatory Statement. While many of the new provisions merely give the force of law to administrative procedures, several are important innovations. It is my intention to keep the situation under observation for about a year during which time we can assess their impact on the banking industry and, if need be, return to the House for another revision.

Mr Speaker, Sir, I beg to move.

Question proposed.

Dr Augustine H.H. Tan (Whampoa): Mr Speaker, Sir, I am sure that we can all take satisfaction with the rapid development of the financial sector in Singapore, as supported by the figures given by the First Deputy Prime Minister. That Singapore has developed into a sophisticated financial centre is no mean achievement. But, Sir, we live in an age when there are threats to the international financial system and, therefore, there is need to look at banking regulations to make sure that the spill-over effects onto Singapore are minimized.

I generally support the provisions of this Bill, but I have a number of questions for clarification to pose to the Hon. Minister. If I may take clause 7 first. It is not clear to me whether the provisions here apply only to domestic banks or to Asian Currency Units, or to both. Furthermore, it is not clear to me whether the provisions of paragraphs (a) and (b) under section 25(1) refer only to individuals, companies and so on, or whether they also refer to countries or sovereign risks. The exceptions which are provided include transactions with the Government. By this, I would take it to mean the Government of Singapore. Is it wise to exempt the Government from the provisions of paragraphs (a) and (b)? With the present Government in power, I think we can safely allow the banks to loan any money to the Government, but should there be a future Government less wise or less frugal, these provisions might be misused.

Secondly, the exemption of transactions between banks can pose a sizable loophole in that very substantial loans could be made to other banks, say abroad, which in turn have very unwise loan portfolios. And sub-paragraph (iv) in that exception reads:-

'(iv) any facilities granted against letters of credit or bills or guarantees or documents in respect of imports into or exports from Singapore;'

Again, why should these be exempted from the provisions of paragraphs (a) and (b)?

Next, Sir, may I refer to clause 14? The ranking of deposit liabilities suggests to me that domestic depositors would have first claim on the assets of any bank that would be wound up or may be wound up.

Dr Goh Keng Swee: Which clause are you talking about?

Dr Augustine Tan: I am talking about clause 14. The ranking of deposit liabilities in terms of their claims on assets in the event of a wind up of a bank is such that domestic depositors have first claim, which means that the deposit liabilities by the Asian Currency Units would have a last claim because these deposits do not require any reserve requirements with the Monetary Authority of Singapore. My question is: what impact would this have on the ACU market in Singapore? Would it destroy confidence on the part of depositors in our ACU banks?

Secondly, in the event of a bankruptcy of any bank which is a branch of a multinational bank, what is the liability of the head office, say, in New York or in London, towards the local branch?

Thirdly, what is the exposure of Singapore banks to sovereign risks. In other words, when we read of the tremendous debts of Brazil, Mexico, Philippines and so on, to what extent are the Asian Currency Units in Singapore committed in terms of these sovereign risks? How concentrated are they? How vulnerable are we?

Fourthly, Sir, we do not have any insurance for depositors at all in Singapore. Is it not time that the MAS went about setting up a system of insurance for depositors, at least up to a certain limit, to protect the small man in the event of a bank failure?

Next, may I turn to clause 15? It is surprising to me that there was no statutory provision at all for the Monetary Authority of Singapore to establish ACUs. Do I take it that they are all illegal up to this point? The Minister has been there for some years already and this is the first time that he is bringing this issue before this House.

Finally, Sir, it is all very well to introduce a lot of regulations, but do we have the manpower to implement these regulations? What is the average age of the senior officers of the MAS, excluding the First Deputy Prime Minister and his Managing Director? I say this purposely, Sir, because it has been brought to my attention that when foreign bankers of note and of position visit Singapore, if they are not big enough to attract a lunch or an interview with the First Deputy Prime Minister or the Managing Director, they are shunted off to some senior officer who is in his twenties or early thirties. I am just looking at it from the point of view of the visiting banker who is usually in his fifties or sixties having to deal with very young officers.

Mr Jeyaretnam: Mr Speaker, Sir, I really rise on a point of clarification from the Hon. Minister. I am concerned with clause 5 of the Bill which, as the Minister has pointed out, introduces three new sections to the Banking Act. The Minister has said quite rightly that the sections do not bring in a total prohibition against persons acquiring an effective control or even having a substantial holding. He has said that it is intended to prevent outsiders taking control of the domestic banks. These new sections do not just apply to foreigners or outsiders. It is intended to apply to Singapore citizens as well. And the Minister then went on to amplify that by saying that it is intended to prevent undesirable persons from taking control or having a substantial holding in the bank. The question, Sir, is who are "undesirable persons"? I see that the arbiter of this is the Authority. Are we to understand that it is left entirely to the Authority to determine whether an applicant, a person who proposes to enter into an agreement, is desirable or undesirable? Following on the last speaker's remarks, one would assume that somebody who is perhaps associated with an opposition party may not be a desirable person. Is that the criterion by which we are going to consider applications? [Interruption].

Mr Speaker, Sir, I do not know what I have heard from Backbenchers there. Would they like to repeat? I would like to answer them.

Mr Speaker: Neither have I heard it.

Mr Jeyaretnam: There is no definition of the categories of persons who should be excluded from taking effective control or having a substantial holding in a bank. I would like the Minister, perhaps if he can, to try and elaborate on this. Against whom is this provision intended? Who are these undesirable persons that he has in mind? Because, as I said, it catches everybody - Singapore citizens and outsiders as well.

Secondly, I am sure the Hon. Minister would agree that even in banking we must bring in the democratic process. As I said, the Authority would appear to be the sole judge. Does he not think that we should provide an appeal from the Authority if the Authority unreasonably refuses to give approval to any intended arrangement? What is the danger in providing an appeal from the Authority, say, to the court, for the court to determine whether the reasons of the Authority are reasonable or not? The new sections 14A, 14B and 14C do not require the Authority to give any reasons. There is no reference to the Authority being required to give reasons. Should the Authority not be required to give reasons where it refuses any proposed arrangement sought to be entered into with a bank by any person in Singapore?

In the same vein, Mr Speaker, Sir, clause 8 (the proposed new section 27A) talks about banks acquiring shares in companies. If you look at the proposed subsection (2), it says:-

'The Authority may approve the entering into the agreement with or without conditions or may disapprove it without giving any reasons.'

Again, may I ask: why should the Authority not be required to give reasons? Should the Authority not be asked to give reasons where it refuses to give its approval to any agreement submitted to it?

That is all I have to say, Mr Speaker, Sir. 3.50 pm

Dr Goh Keng Swee: Sir, I will deal first with the few points raised by the Member for Anson. They are not really matters of great substance. As usual, he believes in the British practice of fair play, manifest justice, such-like doctrine. Let us remember that we are not dealing in law courts but with the banking system where billions of dollars are at stake, where the reputation of bankers is known to the market, where the reputation of rising financiers is known. Therefore, the question of undesirable hands cannot be defined in simple legal terms, nor can decisions made on the acquisition of shares be subject to appeal. Such practices are known in central banks the world over which exercise very much the same powers and discretion as are being sought in clauses 5 and 8. Let me assure him that this is not directed against the hon. Member or any member of his Party. If for no other reason than that, I doubt whether any member of his Party would have the wherewithal to acquire 20%, for instance, he would need something like $280 million to make a bid, just the initial bid for one of our bigger banks.

The Member for Whampoa has raised a number of queries. I am not sure whether I got all his quest.'ons right or whether I have recorded them correctly. First of all, he is in error when he thinks that clause 7 does not apply to foreign banks. It does. In the case of foreign banks which have branches here, the capital funds refer to the net headquarters' funds remitted from the headquarters of the bank to the Singapore branch. And all loan limits are related to net headquarters' funds so remitted.

I am not sure whether I understood his objection to some of these provisions. For instance, he said that there should not be any exemptions from the provisions of section 25(1) (a) and (b) in respect of transactions with the Government, on the grounds that some future government might be less prudent than the present one and therefore should be denied access to bank funds. I have some sympathy with that point of view. I do not think it is possible to legislate against disasters of that kind. Long before the government begins borrowing money from the banks, we will be in dire trouble and matters other than banking will be requiring the attention of the government.

Why should letters of credit be exempted? The answer is that unlike loans and other credit facilities which are really long-term on-going ones, letters of credit and bills of exchange and such like are self-liquidating documents and are therefore exempted from the limits.

He is roughly right in regard to his interpretation of clause 14. It is not so much domestic deposits in the sense of deposits of residents of Singapore which have prior claim. It is the currency in which deposits are made. If you make a deposit with a bank in the Singapore dollar, then the bank is required to keep certain reserves with the Monetary Authority. And therefore in the event the bank goes bust, either because of mismanagement or misfortune, then your deposit has priority over claims arising from deposits in other currencies.

He wants to know how safe the ACU deposits are and what would be the impact on Singapore of a general financial collapse. It is not for me to make predictions about the state of the international monetary banking system other than to say that if it runs into trouble, then I fear that the impact would not only be on the banking system in Singapore but it would probably lead to a world-wide depression of some severity. And that depression would continue until the governments of the industrial countries and the central bankers have put together a more durable and a better international financial system.

In assessing the position of ACU deposits in Singapore banks, Members should remember - it is not widely known - that the great majority of these offshore deposits are held in offshore banks or in foreign banks, ACU units of foreign banks. The local banks have only very small amounts because most of these deposits are deposits of non-residents. For instance, if they are multi-national corporations, they put their deposits in a bank which is known to them in their own country. So in effect, this offshore banking business is largely conducted by foreign banks dealing with foreign depositors and lending to other countries. We are just hosts offering facilities such as office, staff, telex machines and such like.

The direct impact of, say, insolvency or sovereign debt should it arise, to Singapore banks is minimal because they have very small amounts of ACU deposits. And such amounts even if they are unwisely lent would not make a large dent into their total assets. So our local banks, domestic banks, should in terms of financial liquidity stand up to a sovereign debt crisis quite well.

As regards deposit insurance scheme, there was one such scheme in the United States that was necessary. I think it was introduced as a result of the Great Depression when virtually every day one American bank went bankrupt and people lost money as a result of that. We have not had such an unhappy experience. I think it is better to ensure that bankers who handle your money are men of repute and trustworthy people, That is a better insurance, better safeguard, for your deposits than the deposit insurance scheme. If you have a deposit insurance scheme, somebody must pay. Why pay? Why not make sure that the banks in the first instance do not lend recklessly monies entrusted to them?

The second last point he made was in regard to the Asian Deposit, whether they are illegal. I am not a lawyer, Mr Speaker, Sir. But what actually happened is that the applications of the Banking Act were not applied to them. Since the AttorneyGeneral is aware of this situation, I assume that the practices of the Monetary Authority in this regard are quite legal.

As to the age of our bank regulators and the complaints that the Member has received from foreign bankers who want to see the supervisor and are received by someone who looks young but actually is not all that young, and they are quite distressed, the hon. Member must remember that bankers want to see the top man. They even want to see the Prime Minister. They want to see me. On some occasions I unwisely agreed to see them. What happened? What matters did they raise? Things concerning the state of the world economy? Something of grave importance? This is trivial. I told them, "Look, what about letting me manage a few hundred millions of your assets?" You know, sales pitch. So the Member for Whampoa must not be overawed by the foreign bankers, either by their bearing or their age. They are here to do business. We welcome them. They are here to make money. We hope they make money. We are their host. They are our guests. But they must follow our rules and regulations. And if they do that, well, we wish them the best.

Dr Augustine Tan: Mr Speaker, Sir, the complaints give me cause for concern because I had heard that shortly after the Hon. Minister took over --

Mr Speaker: Are you asking for a point of clarification or are you going to make another speech, because Standing Order 44 only allows you to speak once on any question?

Dr Augustine Tan: It is just a clarification, Sir.

Mr Speaker: All right. Carry on.

Dr Augustine Tan: I had heard that he had conducted a Deng Xiao-ping-like purge at the MAS. As a result, it lost many senior officers.

Coming to the point on deposit insurance, Sir, I would urge the Hon. Minister to give serious consideration to this. The reason why I drew his attention to the vulnerability of exposure of Singapore banks to sovereign risks was his amendment to section 56 and his talk about the event of a winding up of a bank. Why should this provision be there unless there is some cause for concern?

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. - [Dr Goh Keng Swee].

Bill considered in Committee. 4.06 pm

[Mr Speaker in the Chair]

Clause 1 -

The Chairman: The citation year will be altered from "1983" to "1984".

Clause 1 ordered to stand part of the Bill.

Clauses 2 to 4 inclusive ordered to stand part of the Bill.

Clause 5 -

The Chairman: The citation year in page 4, line 12, in page 7, line 3, and in page 8, line 1, has also to be altered from "1983" to "1984". This will be done.

Clause 5 ordered to stand part of the Bill.

Clauses 6 and 7 ordered to stand part of the Bill.

Clause 8 -

The Chairman: The citation year in page 12, line 19, has also to be changed from "1983" to "1984". This will be done.

Clause 8 ordered to stand part of the Bill.

Clauses 9 to 16 inclusive ordered to stand part of the Bill.

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