BANKING (AMENDMENT) BILL

Order for Second Reading read. 2.18 pm

The Minister for Finance (Dr Richard Hu Tsu Tau): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

The Banking Act was last amended in 1984 in response to the impact of the Third World debt crisis on the international banking system in the early 1980s. Many banks experienced severe losses because of heavy exposure to Third World debtors, raising concerns of a systemic collapse of the world banking system. The Banking Act amendments then were aimed at insulating the Singapore banking system from adverse developments in the international financial markets. This was achieved by strengthening prudential requirements for banks in Singapore.

Singapore has since developed further as an international financial centre. The financial services sector has become an important contributor to our economy. In the first half of 1993, the sector expanded strongly by 14.6% compared to the same period a year ago. The number of internationally reputable banks with branches and merchant bank subsidiaries in Singapore has grown from 182 in 1984 to a total of 206 from 35 countries today. Their total assets have more than doubled from S$349 billion in 1984 to S$744 billion in 1992. The average daily volume of foreign exchange traded by these banks has increased eight-fold over the same period to reach US$81 billion last year, making Singapore the fourth largest foreign exchange trading centre in the world after London, New York and Tokyo.

Against this background of rapid expansion, both local and foreign banks in Singapore have performed well. Total pre-tax profits of local banks rose by 13.3% in 1992 and 24.4% in the first half of this year while the aggregate pre-tax profits of foreign banks surged by almost 20% in 1992.

The past decade has seen continued turbulence in many major financial markets. Immediately after the LDC debt crisis, banks in several industrialised countries again encountered problems as a result of imprudent lending for speculation in the property and stock markets in the late 1980s. They suffered huge losses when property and stock markets declined sharply as their economies went into recession. In a number of countries governments had to spend large amounts of taxpayers' moneys in bailing out insolvent banks in order to preserve the integrity of their financial systems.

In some countries, financial crises have developed because lax supervision allowed fraud and mismanagement to be left unchecked. A prominent example is the collapse of the Bank of Credit and Commerce International (BCCI) in 1991 which led to large losses for depositors and triggered a crisis of public confidence in some banking systems.

Against this background of international financial instability, the growth of the financial market in Singapore over the past decade has been achieved with high standards of financial soundness. We have been able to avoid many of the scandals and crises that have plagued other financial markets, and have established a reputation as a properly regulated financial centre. Financial business depends critically on the confidence and trust of investors and depositors in the soundness and reputation of the institutions they deal with. Without such confidence and trust, it would be difficult for any financial market to gain international prominence.

However, we cannot rest on our laurels. We must ensure that our financial regulations adequately address the full scope of financial risks, which are constantly evolving. In the last decade, financial deregulation and technological developments have resulted in tremendous changes to the structure of international financial markets.

Firstly, globalisation has led to the interlinking of the world's financial markets. Disturbances in one market are now rapidly transmitted to other markets. This was amply demonstrated in the 1987 stock market crash when a sharp 508-point drop in the US Dow Jones Industrial Average Index triggered similar falls in major stock markets around the world. Indeed, the Singapore stock market suffered an even larger fall of 31% compared to the 22.6% drop in the US stock market during the October 1987 crash.

Secondly, the world of finance has grown increasingly complex, as reflected in the increased use of sophisticated financial derivative instruments such as swaps, options and futures. The volume of outstanding interest rate and currency swaps is estimated by the Bank of International Settlements (BIS) to be US$3.9 trillion as at the end of 1991. The proliferation of such derivatives has resulted in new sources of risks which financial institutions must learn to manage.

The interlinkage of financial markets has raised concern over systemic risks in the international financial system. Regulators recognise the need to strengthen supervision of banks and improve international coordination of regulation in order to avoid a systemic collapse of the global financial system. One result of such efforts was the recommendation of the BIS to require international banks to adhere to common minimum capital adequacy standards. This is to ensure that banks are adequately capitalised in relation to the size of their business. The BIS has also issued guidelines to enhance coordination among national bank regulators in supervising cross border activities of banks.

We must adjust our financial regulations to keep pace with developments in international financial markets. It is therefore timely to review the Banking Act to ensure that the financial sector is able to cope with new risks as well as changes in the structure of financial markets. New provisions are required to improve bank supervision without stifling growth. At the same time, certain rules will be liberalised without compromising prudential standards. These proposals were finalised after extensive discussion with the Association of Banks in Singapore and the local and foreign banks.

With these introductory remarks, I will now deal with the main provisions of the Bill.

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

(a) increase the capital requirements for banks in order to strengthen their financial position;

(b) tighten prudential requirements on single customer limit and unsecured loans to related parties;

(c) lift banking secrecy to facilitate investigations under the Drug Trafficking (Confiscation of Benefits) Act;

(d) allow the Monetary Authority of Singapore (MAS) to regulate the issue and operation of pre-paid stored value cards;

(e) remove exemptions granted to DBS Bank from complying with certain prudential requirements under the Act; and

(f) facilitate the merger of a bank with its wholly-owned subsidiary banks. The Bill also proposes liberalisation of existing provisions to:

(a) relax the requirement on banks to publish their financial accounts in newspapers;

(b) exempt banks with a small portfolio of Singapore dollar loans from complying with the substantial loans limit; and

(c) lift banking secrecy to facilitate head office supervision of their Singapore branches and for other purposes.

Let me now explain in more detail the major provisions of the Bill.

The first major group of amendments proposed in the Bill concerns the capital requirements of banks. These appear in clause 3 of the Bill. Since 1970, local banks have been subject to a minimum paid-up capital requirement of S$3 million. This amount is now grossly inadequate. Total assets of local banks have increased to S$111 billion as at the end of 1992, a growth of more than 300% over the past decade. Capital funds of these banks have also increased substantially through retained earnings as well as through new equity raised from the capital market.

To reflect the growth of the banking business, it is therefore proposed that existing local banks be required to have minimum capital funds of S$800 million. Banks with capital funds below this level will be given five years to comply. Subsidiary banks of local banks will be given a longer period to meet the requirement if their parent banks are already able to comply with the new capital requirement. Generally, local banks are able to meet the new capital requirement.

The Bill also proposes that new locally-incorporated banks would be required to have a minimum paid-up capital of S$800 million. The reason for using paid-up capital is because such banks would not have any retained earnings or general reserves. In order to bring the capital requirements for existing and new local banks in line with each other, the Bill also proposes that existing local banks may be subject to a minimum paid-up capital requirement of S$800 million at any time from five years after the commencement of the amendment Act. This would provide sufficient time for existing local banks to comply with the requirement.

The Act presently requires the head office of foreign banks to have a minimum paid-up capital of S$6 million before they are permitted to establish branches in Singapore. The Bill proposes to raise the minimum paid-up capital requirement to S$200 million in order to ensure that foreign banks which set up operations here are financially sound and adequately capitalised. This requirement will only apply to new entrants. In addition, the Bill proposes to increase the net head office funds requirement for foreign bank branches from S$3 million to S$10 million. This is to ensure that foreign banks' head offices commit adequate capital resources to their Singapore branches in relation to the scale of their banking operations here. Foreign banks will be given six months to comply. The grace period for any individual foreign bank may be extended, if necessary.

The Bill also proposes to require local banks to have a minimum capital adequacy ratio of 12%. The capital adequacy ratio requirement was introduced by the Committee on Banking Supervision of the BIS as a measure of the adequacy of capital funds maintained by banks in relation to the level of risk of their loan and investment portfolios. Assets which carry a higher level of risk would need to be supported by a higher amount of capital. Hence, banks which engage in higher risk activities should have a commensurate amount of capital to cushion against any default or loss from such activities. The BIS currently requires banks to have a minimum capital ratio of 8%. However, this requirement covers only credit risk of banks and could be increased in future to account for other risks such as market risks of foreign exchange and equities, interest rate risks and other off-balance sheet risks. The Bill proposes that local banks be required to maintain a minimum capital ratio of 12% to ensure that they can cope with unexpected losses as well as any future increases in the capital adequacy ratio requirement by the BIS. As an indication of the importance of off-balance sheet activities, the off-balance sheet commitments of local banks account for almost 50% of their total on-balance sheet assets. Currently, local banks are able to comply with the 12% minimum capital adequacy requirement.

Let me now turn to the amendments to prudential requirements of banks.

Currently, a bank is not allowed to extend credit facilities in excess of 30% of its capital funds to a single customer or a group of connected customers. The amendment proposes to reduce this limit to 25% of a bank's capital funds in line with the recommendation of the BIS. Banks would be given two years to reduce existing exposures to customers which exceed the new limit.

The reduction in single customer limit should not adversely impact banks' operations or reduce the availability of credit facilities to customers as the capital bases of banks have increased substantially over the years. For example, the aggregate capital funds of local banks have increased by more than 175%, from S$4.6 billion at the end of 1983 to S$12.7 billion at the end of June 1993.

The failure of many banks and thrifts in the United States was partly due to imprudent lending to related parties without proper credit assessment and adequate collateral. Singapore has been able to avoid such problems because under section 29 of the Act, a bank is not permitted to grant unsecured credit facilities exceeding S$5,000 to any of its directors or any firm in which a director of the bank has an interest.

The definition of "firm" however covers only sole proprietorships and partnerships but not companies. This has created a loophole for bank directors to channel unsecured lending through companies which they control. The Bill therefore proposes to amend section 29 to extend the restriction on unsecured lending to cover private and non-listed public companies in which any director of the bank owns more than 50% of the share capital or controls the composition of the board. Public listed companies and their subsidiaries are excluded because they are subject to the scrutiny of the investing public and the Stock Exchange of Singapore. Banks would be given two years to bring existing credit facilities within the new limit.

Parliament has recently enacted the Drug Trafficking (Confiscation of Benefits) Act to make the laundering of proceeds from drug trafficking a criminal offence. The Drug Trafficking (Confiscation of Benefits) Act enables the investigation, tracing, freezing and seizure of proceeds from drug trafficking and allows legal assistance to be given to foreign enforcement agencies upon fulfilment of certain conditions. To implement this Act, the Banking Act would have to be amended to allow the lifting of banking secrecy provisions to facilitate drug trafficking investigations. To ensure that banking secrecy provisions are lifted only for genuine drug trafficking investigations, safeguards such as the need to establish a prima facie case of drug trafficking will be instituted. Also, assistance will only be provided to foreign authorities if this does not prejudice the sovereignty or other national interests of Singapore.

The next amendment concerns new provisions at section 77A in clause 20 of the Bill to regulate the issuance of pre-paid stored value cards. Such cards are a form of "electronic cash" and can be used by cardholders to pay for purchases of goods and services at establishments which accept the card. The issuers of pre-paid stored value cards collect moneys from cardholders in advance. Cardholders are therefore exposed to the risk of loss should the issuer become bankrupt or misappropriate the cardholders' funds. It is therefore necessary to regulate the issue of such cards to protect the public against default by card issuers.

Under section 77A, only licensed banks and POSB would be allowed to issue pre-paid stored value cards with the approval of the MAS. Unused proceeds from the issue of such cards would be subject to reserve and liquidity requirements. Pre-paid stored value cards that can only be used for payment of goods and services provided by the issuer of the cards would be exempt from such regulation. This is because the risk to cardholders in such cases is much lower. The amendment also empowers MAS to exempt pre-paid stored value cards issued before the introduction of this amendment Act from the regulation.

Under existing provisions, DBS Bank is exempt from certain prudential requirements, for example, the limit on investments, holding of immovable property and loans secured by immovable property, to enable the bank to perform its role as a development bank. DBS Bank has, however, now abandoned its role as a development bank and has expanded into Columnn: 446 all areas of commercial banking. The amendment therefore proposes to remove the exemptions granted to DBS Bank so that the bank would be subject to the same regulation as other banks. This will ensure adequate prudential control over DBS Bank. Members may wish to know that DBS Bank is presently able to comply with all these prudential requirements.

Certain provisions of the Banking Act which have outlived their relevance and usefulness because of changes in business environment and banking practices will be relaxed. The first concerns the need for banks to publish detailed audited annual accounts in newspapers of the four official languages. Feedback indicates that the public does not study such information in depth and the requirement increases the banks' cost of operations unnecessarily. The Act will be amended to allow MAS to prescribe by regulation the requirements for the publication of banks' annual accounts. The intention is that banks which accept retail deposits in Singapore dollars from individuals would continue to publish their annual accounts in newspapers of the four languages. Those banks which do not accept such retail deposits, such as offshore banks, would only need to publish their annual accounts in one English language newspaper. MAS would also lay down the minimum information that banks would be required to publish.

Presently, a bank is not allowed to grant substantial loans (ie, loans which exceed 15% of the bank's capital funds) which in aggregate exceed 50% of its total credit facilities. This is to prevent over-concentration of credit to a few large borrowers. It is proposed that banks with Singapore dollar loan portfolios of not more than S$100 million be exempted from this requirement. This is because such banks, mainly the offshore banks, which primarily engage in foreign currency wholesale lending activities would find it impractical to diversify their Singapore dollar lending to small customers. Furthermore, as the Singapore dollar loan portfolios of such banks are relatively small, the exemption from this limit would not pose a significant risk. Columnn: 447

With the growth in importance of international activities of banks, the operations of overseas branches have an increasingly important impact on the soundness and performance of the bank as a whole. In view of this, it is important for the head offices of banks to closely monitor the operations of their overseas branches by having access to information on these branches in order to effectively manage their global risks. In addition, from the experience of the BCCI scandal, the growth of cross-border activities of banks has also underscored the need for closer international coordination among bank supervisors. Hence, it is proposed that certain aspects of the banking secrecy provisions at section 47 of the Act be relaxed or modified to accommodate these requirements. The main amendments to section 47 are:

(a) to allow the Singapore branch of a foreign bank to release information on foreign exchange, money-market and other transactions with other banks to its head office to enable the head office to monitor risks on a global basis;

(b) to allow the Singapore branch of a foreign bank to provide information on credit facilities granted by the branch, and MAS to provide information on the operation of foreign banks in Singapore, to the supervisory authority responsible for regulating the bank's head office, provided that the supervisory authority is prohibited by its domestic law from divulging the information or gives an undertaking to MAS not to divulge the information to third parties;

(c) to allow banks to disclose to other credit and charge card issuers information on credit and charge cardholders whose cards have been suspended or cancelled due to default on payments so as to minimise bad debts incurred by card issuers in respect of their credit and charge card business; and

(d) to facilitate the application for a grant of probate or letters of administration by the personal representative or any person entitled to letters of administration of a bank customer who had died whether testate or intestate.

The Bill introduces three main sections, 14A, 14B and 14C, on the merger of banks. Several local banks have wholly-owned bank subsidiaries. With increasing competition in the domestic market and the shortage of manpower, these local banks have indicated that they would like to merge with their wholly-owned bank subsidiaries to realise economies of scale and to increase productivity. However, they have pointed out that existing provisions for mergers and takeovers in the Companies Act pose considerable impediments to bank mergers, particularly in the transfer of assets and liabilities and contractual rights and obligations of the existing banks to the merged entity. Hence, the objective of the new provisions is to facilitate the merger of a bank with one or more of its wholly-owned bank subsidiaries.

The new provisions would allow a bank to apply to the Minister for Finance for approval of a merger with one or more of its wholly-owned subsidiaries. When approval is given, all undertakings of the existing banks would be transferred to and vested in the merged bank. This would allow the merged bank to carry on business with minimum disruption and inconvenience to depositors and other customers of the bank. As the proposed new provisions only involve the merger of wholly-owned subsidiaries, the provisions in the Companies Act regarding corporate mergers for protection of minority shareholders would not be relevant in this case.

Finally, the Bill also proposes a number of housekeeping amendments to the Act. These include the provision for MAS to issue regulations to regulate the operations of credit and charge card issuers. Presently, such power is exercised under the MAS Act. As most card issuers are banks, it would be more appropriate for such activity to be regulated under the Banking Act. It is also proposed that MAS be given the power to supervise the operation of the Clearing House which clears the cheques of banks' customers. As the Clearing House is an integral part of the payments mechanism of the banking system, the prudent management of the Clearing House is critical to the soundness and stability of the banking system. The provision of oversight powers to MAS is needed to ensure the efficient functioning of the Clearing House. Another amendment allows MAS to issue notices to banks on their operations. These would include notices on banks' licences, publication of accounts, maintenance of reserve requirements, provision for bad and doubtful debts and the submission of statistics and returns. Some of the other provisions are merely to give the force of law to administrative procedures and do not warrant any special mention in addition to what has been stated in reference to them in the Explanatory Statement.

Sir, I beg to move.

Question proposed.

Mr Speaker: Order. I suspend the Sitting and will take the Chair again at 3.15 pm.

Sitting accordingly suspended at 2.49 pm until 3.15 pm Sitting resumed at 3.15 pm

[Mr Speaker in the Chair]

Debate resumed.

Dr Ow Chin Hock (Leng Kee): Mr Speaker, Sir, banks are important institutions in modern economies. Banks contribute to the growth of other sectors and in turn they grow with the economy. Scandals, defaults and failures of banks have serious financial, economic and even political consequences. Apart from the notorious BCCI (Bank of Credit and Commerce International) disaster, there were also reports on problems of the banking sector in other countries, for example, the difficulties of Japanese banks in meeting BIS (Bank for International Settlements) standards in September 1990 or the so-called Black September, the troubles of American Savings and Loan industry, the banking crisis in Sweden, Norway and Finland due to de-regulation and supervisory shortcomings, and the problems of some Australian state banks due to over-expansion of credit. These examples and cases all underline the importance of financial prudence and discipline. They also illustrate the need for continuous regulation and supervision by central banks and other monetary authorities.

The Monetary Authority of Singapore (MAS) should be congratulated for refusing to give a banking licence to BCCI. The right decision has protected many Singaporeans from the big swindle. The Prime Minister had complimented MAS for its firm stand against the BCCI application in his National Day speech in 1991. As our financial sector continues to expand, and as the financial market becomes more sophisticated in terms of credit instruments and technology, the regulatory and supervisory authorities (in our case, MAS) should be more vigilant and more prepared for potential problems. The authorities must also be determined to act. While we may need to relax some of our financial regulations in response to the changing market conditions and keener competition, this should not be achieved at the risk of exposing our banking system to potential scandals and defaults. We should aim for steady growth on a sound and solid foundation. Hence, I support the Banking (Amendment) Bill.

Mr Speaker, Sir, let me know focus my comments on two areas: one, increasing capital funds of banks, and, two, information and banking secrecy.

Increasing capital funds of banks

Clause 3 of the Banking (Amendment) Bill seeks to raise the minimum capital funds of all local banks from $3 million to $800 million within five years. On the other hand, foreign banks intending to set up branches in Singapore must have a minimum paid-up capital of $200 million in their headquarters. Clause 5 sets out the procedure for the merger of banks with their subsidiaries. Taken together, these amendments under clauses 3 and 5 can be interpreted that MAS wants to increase the size of banks operating in Singapore. This is perhaps because larger banks can (1) benefit from the economies of scale; (2) compete more effectively in the regional and international market; and (3) better withstand the storm within its industry or economic recession in future. The American experience has taught us that it is better to inject more capital into the banking system where the system is doing well and when the economy is growing. When President Bush urged American banks to increase their loans and advances in order to stimulate the economy, the banks had no money. Therefore, I support the amendments in clauses 3 and 5. However, may I ask the Minister why he set the minimum capital requirement at $800 million and not higher, when nearly all our local banks have exceeded this minimum? Also, why are foreign banks which already have branches in Singapore exempted from the $200 million minimum capital requirement?

Information and banking secrecy

Let me now turn to information and banking secrecy. Information is an important input and a valuable asset to the financial sector. It facilitates financial transactions and improves efficiency of the financial markets. However, information concerning credit facilities, bank accounts, personal data and so on should be safeguarded and not allowed to be disclosed to unauthorised parties; otherwise, the confidence of customers will be undermined. Hence, section 47 of the Banking Act provides banking secrecy to safeguard the banks' customers. Clauses 15 and 16 of the Amendment Bill seek to amend this section. I give full support to clause 16 which introduces new provisions designed to assist in the investigation of drug trafficking offences when a bank's customer is involved. These provisions are complementary to similar provisions in the Drug Trafficking (Confiscation of Benefits) Act, as mentioned by the Minister. Moreover, the information required under this clause can only be obtained by an application from the Attorney-General through a court order.

Clause 15 allows MAS to "inquire into any credit facilities granted to the customer by a bank", and to exempt from banking secrecy six additional cases. The case mentioned in paragraph (h) in page 14 of the Bill is about giving information of a deceased person's bank account to his personal representative or any person entitled to letters of administration. This is a straightforward case. Another case found in paragraph (j) of the same page is about giving specific information to credit card issuers relating to a customer whose credit card has been suspended or cancelled. This may be necessary since the number of credit cards issued has increased very rapidly from 239,000 in 1984 to 1.06 million in 1992. I expect the amount of bad debt written off because of default in payment has increased over these years. May I ask the Minister to tell the House what is the amount of bad debt written off in recent years so as to give us a sense of proportion, and to justify the exemption from banking secrecy in paragraph (j).

I support the other exemption cases from banking secrecy in clause 15 relating to the exchange of information between branches and headquarters, within banks, between different banks, between banks and supervisory authorities, or between different supervisory authorities. This helps the supervisory authorities to detect problems earlier and to help the headquarters to better manage their branches. However, the exchange of information provided under these cases should be carried out cautiously and no information other than those stipulated in the relevant paragraphs in clause 15 should be given. This is to preserve the confidence of the customers in our banks and to maintain competitiveness of our banking system.

Sir, let me seek clarifications on two other clauses. Clause 20 introduces a scheme of control over the issue of stored value cards. This is perhaps in anticipation of future problems of the issuers not complying with the terms and conditions under which the cards are issued, and also to avoid over-issuing of such cards. As I understand it, we have very few stored value cards now. May I ask the Minister to inform the House of the current situation and to project the future growth of stored value cards in Singapore to illustrate the necessity for this amendment under clause 20.

Finally, clause 6 deals with the publication of bank accounts in local newspapers. The feedback I have from the non-English newspapers is that they are not happy with this amendment. But I notice that the Minister will be moving an amendment to this clause, so I will not make further comments. I simply want to find out from the Minister how much money the banks can save per year.

Mr Leong Horn Kee (Thomson GRC): Mr Speaker, Sir, I have some interest in this Bill as I was formerly working in the banking industry. I have spoken to various people in the banking industry. The general reaction I received was that they were all supportive of this Bill and they found many of the provisions very acceptable. I too would like to say that I find the provisions well conceived and well intended.

I would like to just comment on two major provisions in this Bill. They are on the minimum requirement of capital funds and the capital adequacy ratio. I note that the definition of "capital funds" in this Bill for companies having their headquarters in Singapore is "the paid-up capital and published reserves of that bank deduction having been made in respect of any debit balance appearing in the profit and loss account of the bank". It appears to me that this definition is fairly general and may even be sometimes unclear. I could take it in accounting terms to mean shareholders' fund. I do not know whether I am right. But if it is the case, many of the large local banks would definitely have no problem in meeting this minimum capital requirement of $800 million. However, there are several smaller banks (which are not the four, five or six major banks in Singapore) which do have some difficulty in meeting this $800 million capital fund requirement. However, several of these small banks are subsidiaries of major banks in bigger banking groups. For these multiple-bank groups, they would have to definitely rationalise their operations to consider whether to merge the few banks under their control into one, as now provided for in the Bill, or to spun them off as independent banks, provided they can add in the capital funds, as required under the Bill during the next five-year period.

I would like to state that the general effect of this minimum requirement of $800 million capital funds is a very strong stabilising factor for the banking community. It will create more confidence in our local banks, both domestically and internationally. However, some view that this Bill provides for a consolidation or rationalisation of the banking industry in Singapore. The minimum capital requirement of $800 million would force the banks to form into major groupings. This, while having the beneficial effect of providing a more prudent banking environment, may also pose a barrier to entry for new banks which need to have $800 million before they can form new banks in Singapore. I would like to ask the Minister whether this would restrict competition and also prevent new entrants with new ideas, new concepts and new technologies into the industry.

On the other hand, I note that, as Dr Ow has also mentioned, the Bill has defined a minimum capital requirement of only $200 million for banks whose headquarters are not based in Singapore. For some of these foreign banks, they may have been given full banking licences and therefore operate practically on the same basis as other local banks, except for the number of branches. In this case, as compared to our local banks which are required to have a capital fund of $800 million, there may in fact be a discrimination in favour of foreign banks. This could be seen to counter the allegations in the past by foreign countries that our banking laws favour and protect the local banks and discriminate against the foreign banks. Now, it appears that the opposite is so. I would like to voice my concern about the foreign banks which are able to take local Singapore dollar deposits; would not our local depositors in these foreign banks be less protected since their minimum capital requirement is only $200 million? In fact, they are being favoured compared to our local banks which need to have $800 million of capital funds.

On the topic of capital adequacy ratio, I note that the Bill has stated a minimum requirement of 12% for Singapore-incorporated banks. I understand that most local banks will have no difficulty in meeting this capital adequacy ratio. It is, indeed, a reflection of the strong and healthy state of our banks. This is most commendable.

The Bank for International Settlements (BIS), however, lists out the minimum adequacy ratio of 8%. I presume that the BIS has come to a conclusion that 8% is generally enough for protection.

As a contrast to our local banks which will have to meet a higher adequacy ratio of 12%, the foreign banks operating here which are subject to their own domestic requirements overseas may actually be operating only on an adequacy rate of 8%.

Therefore, I would like to ask the Minister whether we are setting too high a ratio for local banks which, although is a prudent move, put them at a competitive disadvantage. Similarly, for depositors who put money in these foreign banks, would they therefore not be less protected because many depositors, especially those who are less educated, may not be aware that foreign banks may be subject to a lower adequacy ratio of only 8% whereas our local banks need to have a higher ratio of 12%. My question to the Minister is: why is it not possible, within practical reasons or international banking rules, to allow for both domestic and foreign banks to be subject to the same standards and requirements, and the same rules? Perhaps, the Minister can elaborate and explain.

I would like to conclude by commenting that the tougher banking rules as required by the new Banking (Amendment) Bill are all very well-received and would be beneficial for the future development and growth of the banking industry in Singapore.

Sir, I wish to express my support for the Bill.

Dr Toh Keng Kiat (Nominated Member): Mr Speaker, Sir, we have heard the Minister tell the House that the last time the Banking Act in Singapore was reviewed was nearly 10 years ago because of the staggering Third World debt crisis and the tailspin that banking went into around the world. Since that time, Singapore had gone through a recession which saw our banks and the rest of the economy suffering adversely.

For two consecutive years, in 1985 and 1986, the local banks saw a contraction of minus two percentage points in the capital funds and reserves. Today, our economy is again in a robust health. Singapore has matured as a financial centre and our banks are reporting double digit growth of 13% and 17%, respectively, in their reserves for 1991 and 1992. Many banks have also gone regional and some global. In terms of capital reserves, a few of our banks have surpassed OECD competitors but, sadly, they are still ranked in the worst position when it comes to risk-exposure. It is, therefore, appropriate that the issued and paid-up capitals of our banks should be raised from the currently unrealistically low levels of $3 million. Increased capitalization will enhance the corporate image of Singapore banks.

The Banking (Amendment) Bill 1993 seeks to do this by increasing the capitals of our banks to $800 million. But, Sir, it is not this leap in the quantum of paid-up capitals which it seeks that will make this Bill important, but rather the quantum leap in the changes to some other areas of banking activity that it provides. I refer to the removal of some exemptions from and exceptions to be made to the existing Act.

The proposal to increase the capital can be met by most of the major banks in the Fourth Schedule. But even then, some may have to resort to cash calls, rights and bonus issues to meet this requirement. The smaller banks may be forced to merge or cease operation. The Bill has provisions to facilitate merger which are outlined in sections 14A to 14C. It even provides for an exemption to banking secrecy for this purpose.

The Bill also empowers the Minister to make a final decision on whether to approve or disapprove a merger without his decision being called into question. Sir, as there are no provisions in the Bill for it, I would like to ask the Minister whether a rejected merger application can be re-submitted involving the same parties at a later date and, if so, under what circumstances.

The Banking (Amendment) Bill also calls for an increase in the capital adequacy ratio to 12%. As I am given to understand, our banks are already doing this and maintaining the capital adequacy ratio at the more than 8% currently recommended by the Bank for International Settlements. Indeed, most of them keep this above the 12% proposed by the Bill and this is calculated with first-tier capitals, discounting the risks which the Minister alluded to. This new section of the Bill will, therefore, only serve to formalise an existing practice.

Sir, since its incorporation, DBS Bank has been viewed as a favoured bank. The removal of exemptions for DBS Bank will be welcomed to competitors as having a more even playing field. Exceptions to banking secrecy, however, other than those which apply to laundering of drug trafficking money, will be less acceptable.

There are proposals in this Bill for exemptions from banking secrecy, in housekeeping activities with respect to credit given to customers and also in the regulation of Clearing Houses. Whilst the new section 47A is a necessary deterrent to drug traffickers by denying them the pleasure of their ill-gotten gains, the proposed section 54A and the power given to the Monetary Authority of Singapore to inspect the books, accounts and transactions of Clearing Houses will be viewed by the banking community as an infringement of the autonomy that they now enjoy in the management of their activities.

Sir, with exception to section 47A, these intrusions into banking secrecy may hinder the further development of Singapore as a financial centre at the time when some of our neighbouring countries are offering haven banks to foreigners.

Finally, Sir, while the banking industry in Singapore has neither been tarnished nor scarred by the scandals and corporate failures of a magnitude that has disfigured foreign banks, we have, however, had our share of the minor blemishes and slight dents created by the occasional delinquent. If not for the vigilance and the supervision of our Government and the Monetary Authority of Singapore, the situation would have been worse. The Bill will further improve banking practice here and enhance the profile of our financial institutions.

I support the Bill.

Dr Richard Hu Tsu Tau: Mr Speaker, Sir, I would like to thank the speakers for generally supporting the amendments to the Banking Act. There are a number of questions, some of which are overlapping, which I will take in turn.

First, Dr Ow asked why the minimum capital requirement of $800 million should not be higher. At this point of time, we consider the amount adequate. Indeed, over time the minimum capital requirement will be raised but, as of now, of the six local banks, four more than adequately meet this requirement. The two smaller ones are very near this limit and should be able to attain this requirement within a year or so. This excludes the wholly-owned subsidiaries of the local banks which have much smaller capital but, in connection with the question by Mr Leong, these smaller subsidiaries would not be required to meet the $800 million requirement provided their parent banks meet the requirement. So they can ask for extensions, because their parent banks already meet the $800 million minimum requirement. And over time, we would assume that many of these banks would want to consolidate and merge.

As a matter of fact, the four largest local banks have capital funds, which include shareholders' funds, well in excess of $800 million. So there is no problem in meeting this requirement in the future.

The second question is why are foreign banks, which already have branches here, not required to increase their capital requirement to the same level as local banks and would it place our local banks at a disadvantage. First, I must point out that foreign banks, which have branches here, are actually only branches of international banks which account for perhaps no more than 2% or 3% of their global operations. These are branches of very large international banks and up to now, our policy of admitting these banks is highly discriminatory, ensuring only banks which are amongst the top 300 in the world would be allowed to come in. So there is no question that the capital requirements of the parent banks would more than meet the $800 million requirement. But to impose this excessive amount for their branches here is unnecessary because these branches will have full access to their head office funds at any time they need them. In other words, they are fully supported by their parent banks.

Secondly, foreign banks, which have branches here, may have actual local capital funds which are well in excess of $1,000 million because if they want to lend substantial amounts of money, they would be required to meet the single customer limit of 25%. For example, if they have a customer who wants to borrow $50 million, they must have $200 million worth of capital before they can lend to this person. So, in fact, the actual amount of capital they have in Singapore to service their loans is already very adequate.

The next question that Dr Ow asked was about credit cards and whether the bad debts have increased. Indeed, they have. In 1988, the total amount written off as bad debts was $5.4 million, accounting for 0.4% of total credit card billings. In 1992, the bad debts written off had increased to $24 million but it is not as bad as it looks because the amount of billings has increased substantially. So the $24 million written off represents 0.6% of the total billings in view of the increase in billings. By comparison, the average write-off in US credit cards is currently 6%, so we are only one-tenth. But we have to be careful to ensure that it does not increase substantially above current levels.

On stored value cards, there are two types of stored value cards. One is a stored value card specific to a company which can be used only for the purchase of goods and services granted by the company. This type of stored value card is no different from buying a gift voucher. Therefore, regulation of this area is not really necessary because the risks are quite low. The area where we have to be very careful in regulating is in the issuance of what we call cash stored value cards. Such cards can be used to purchase goods from any supplier and therefore are equivalent to cash. They must be regulated because if a substantial amount of such cards are issued, it is tantamount to taking money from the public and if the card issuer goes bankrupt, or misappropriates the cash, then of course the public will lose. It is this category which requires supervision.

The final point raised by Dr Ow was on the question of bank account publications. The present law requires that all banks, irrespective of whether they are local banks or offshore banks, must publish their annual accounts in the newspapers of the four official languages. This is an anachronism because when the requirement was first stipulated, we did not have such a large number of offshore foreign banks as we have now. These offshore banks which are basically involved in wholesale banking in foreign currencies with non-Singapore citizens, and to require them to publish their annual accounts in four languages is, quite honestly, a waste of money. The average cost to banks is not excessive but it is money which is not well spent. For full-service local banks, the publication of the annual accounts will cost between $20,000 and $50,000 a year, depending on how much details the banks are prepared to publish. For offshore banks, the amount is about $10,000-$15,000 per bank. The total cost to all the banks currently is just under $2 million. The intention is that for the future, only full-service local banks which take deposits from Singaporeans will continue to be required to publish their annual accounts in the four languages, so that all depositors will have access to the banks' statements. In the case of offshore banks, they will only be required to publish annual accounts in one English language paper.

Mr Leong has asked whether the new capital requirement would restrict the entry of new banks into Singapore. The answer is no. Singapore is already grossly over banked. We have a total of 35 banks with full banking licences - 13 local banks and 22 foreign banks with branches here. Thirty five full-licence banks for a small population like ours is gross over banking. I do not think this really restricts competition.

On the question of why we are requiring local banks to have a capital adequacy ratio of 12% instead of maintaining 8% as required by BIS, the answer is very simple. The higher the capital adequacy ratio, the better for the bank. The fact remains that well-capitalised banks, eg, the Morgan Guaranty Bank in the United States, are probably more successful because high capital reserves, high capital funds, give the customer much more confidence and therefore their growth rate generally is superior. Secondly, a well-capitalised bank can also borrow at cheaper rates, issue bonds at lower rates and issue shares at lower premiums. Therefore, there is considerable advantage in having adequate capital funds.

In the case of Singapore banks, their actual ratios are well in excess of 12%. So the 12% requirement is conservative. And the indications are that BIS will be planning to increase the international level beyond 8% to take care of, what I call, off-balance sheet risks which I mentioned in my speech. 8% was established by BIS because if they had put 12% as a requirement, many, many large international banks would be in trouble. So it is a conservative figure which is acceptable at the present time but it is likely to be raised in future, and we are merely anticipating events.

Finally, Dr Toh has asked whether applications for mergers, if they were turned down, could be considered for appeals. The answer must be yes. There is no reason, as far as I can see, to turn down a legitimate request for merger, particularly if the subsidiaries are already wholly-owned by the banks, and it will be very unusual to refuse a merger under these circumstances.

He has also said that the lifting of banking secrecy, particularly in the credit card area and other areas, might lead to a reduction of competitiveness in the Singapore banking system. I can assure him that this is not the case. Information on individual accounts is generally not releasable to anyone. It is consolidated data which is required by the supervisory and regulatory authorities which would be released under specific circumstances. We are very careful on this and it is an area which we cannot readily allow our banking secrecy to be jeopardised. So he can have my assurance that this will not prejudice our competitiveness.

Finally, the same thing applies to the inclusion of the clearing house under MAS supervision. It should not in any case affect the competitiveness of our system because supervision of the banking clearing house is no different from supervision of the banks themselves, and MAS has regularly inspected and supervised banks without any difficulties.

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 Richard Hu Tsu Tau].

Bill considered in Committee.

[Mr Speaker in the Chair]

Clauses 1 to 5 inclusive ordered to stand part of the Bill.

Clause 6 -

Dr Richard Hu Tsu Tau: Sir, I beg to move, In page 8, line 2, to leave out from "in" to ", a" in line 5 and insert "such newspaper or newspapers as may be prescribed by regulations".

I have explained in my speech the reason for this change.

Amendment agreed to.

Clause 6, as amended, ordered to stand part of the Bill.

Clauses 7 to 22 inclusive ordered to stand part of the Bill.

Bill reported with an amendment, read a Third time and passed.