BANKING (AMENDMENT) BILL

Order for Second Reading read.

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 1993. Since then, the international financial market has witnessed the collapse of Barings, the massive fraud in the New York branch of the Daiwa Bank and losses suffered by leading international financial institutions from trading in derivatives. During this period, the Japanese banking system was also adversely affected by the large exposures of its banks to the problem real estate sector. A number of the smaller Japanese banks had to be bailed out by the Japanese government.

In addition to the need for proper regulation and strong internal controls, one of the key lessons learnt from these events is the importance of having strong capital to underpin banking operations. As banks venture into more sophisticated financial instruments, the risk which they undertake also increases, hence the need for stronger capital. Financial institutions with stronger capital are better able to withstand financial crises and to undertake risk.

Another lesson from recent events is the need for closer cooperation among banking supervisory authorities in the supervision of financial institutions with international cross-border operations. As the world's financial markets become more closely linked, disturbances in one market are now transmitted more rapidly to other markets. This further underscores the need for closer cooperation among financial regulators in protecting the integrity and soundness of the international financial system.

As an international financial centre, it is important for Singapore to review its financial laws and regulations in the light of international financial developments and trends to ensure that the laws and regulations continue to be effective in maintaining the soundness of our financial system. Against this background, let me explain the rationale for the proposed amendments to the Bill.

One of the key amendments proposed in the Bill is to increase the minimum capital requirement for locally-incorporated banks. Since the last amendment of the Banking Act in 1993, the total assets of the six local banking groups have increased by almost $38 billion, or 27%, from $141 billion to $179 billion. The four largest banks rank among the top 200 banks in the world in terms of capital funds and among the top 300 by assets.

In view of the strong growth in our local banks' business over the last few years and their plans for expansion into international financial markets, it is prudent to require them to further strengthen their capital to better protect depositors' interest and ensure that they have adequate capital resources to compete effectively in the global marketplace.

The Bill proposes to raise the minimum capital funds requirement (defined as paid-up capital plus retained earnings and published reserves) for locally-incorporated banks from $800 million to $1,500 million. Local banks would be given a grace period of five years to comply. Of the six major local banks, the `Big 4' are already able to meet the requirement. The other two banks, namely, Tat Lee Bank and Keppel Bank, have capital funds of $1.1 billion and $1 billion, respectively, and should have no difficulty meeting the requirement within the five-year grace period through profit retention and capital injection.

The Bill also proposes to raise the minimum paid-up capital for newly-incorporated local banks from $800 million to $1,500 million. In order to bring up the paid-up capital requirement from existing banks in line with that of newly-incorporated banks, the existing local banks may be required to increase their paid-up capital to not less than $1,500 million at any time five years after the Amendment Act has come into operation. MAS will give sufficient time for existing local banks to meet with the requirement, when it is introduced.

The Bill also proposes that the Monetary Authority of Singapore (MAS) be allowed to grant subsidiary banks of the local banking groups a longer grace period to meet the new minimum capital funds requirement. Notwithstanding this provision, it is MAS' intention to encourage these banks to merge with their parent banks in order that they could make better use of their resources and reap the benefits of economies of scale.

The second key amendment proposed in the Bill is to allow foreign banking supervisory authorities to inspect their banks' operations in Singapore, which is presently not permitted. The collapse of a number of financial institutions with cross-border operations, such as the Bank for Credit and Commerce International (BCCI) in 1991 and Barings in 1995, had led banking regulators to re-examine the supervision of large international banks which culminated in the issue of a set of supervision standards by the Bank for International Settlements (BIS) for the supervision of banks with substantial international operations. One of the basic principles embodied in the standards is the need for home supervisory authorities to exercise effective consolidated supervision over their bank's global operations. One way of achieving this is for supervisory authorities to inspect their banks' overseas operations.

Although MAS routinely inspects banks, including foreign banks in Singapore, the Authority has received requests from a number of foreign banking supervisory authorities to inspect their banks' branches in Singapore directly in order to fulfil their responsibility under the BIS principles of consolidated supervision. The US bank regulators have been particularly keen to inspect their banks' operations in Singapore as bank examination is central to their supervision process. The major international financial centres, such as the United States, United Kingdom, Japan, Australia and Hong Kong, allow home supervisory authorities to inspect foreign banks operating in their jurisdictions.

As an international financial centre, it is important that Singapore should cooperate more closely with other banking regulators to strengthen the supervision of large international banks whose operations could threaten the stability of the international financial system if they are not properly supervised, provided that this does not undermine depositors' legitimate right to secrecy on their banking information. The Bill, therefore, proposes to allow foreign supervisory authorities to inspect the Singapore branches of banks whose head offices are incorporated in their respective jurisdiction, subject to certain safeguards.

To safeguard the confidentiality of customer information, the proposed amendment requires a foreign supervisory authority which intends to conduct an inspection of its banks' operations in Singapore to obtain prior written permission from MAS before conducting the inspection. In addition, the foreign supervisory authority must be prohibited under its domestic laws from divulging information obtained from the inspection to other parties. If not, the foreign supervisory authority would have to undertake to MAS not to divulge the information to other parties. The foreign supervisory authority would only be allowed to examine credit facilities and the internal control systems of the Singapore branch and, with prior approval of MAS, other matters relating to the operation of the branch. Foreign supervisors would be prohibited from accessing depositor information of the branch.

Presently, the Act does not require persons who have access to reports produced by MAS, pursuant to its inspection of banks, to keep such reports confidential. The Bill proposes to include a new provision in the Act to ensure that information in such reports is not misused for purposes other than its intended objective, which is the prudential supervision of banks. With the new provision, any person, including staff of banks, who has access to inspection reports prepared by MAS, is required to keep the information contained in the reports confidential. It would be an offence for such persons to disclose the contents of these reports to parties who are not authorised under any written law in Singapore to receive the information.

Some international banks which have operations in Singapore have centralised their data processing function in their head office or other overseas branches in order to reap cost-reduction benefits from economies of scale and for a more efficient and effective management control. In order that their Singapore operations may also enjoy these benefits, the Bill proposes to allow certain types of information to be transmitted by foreign banks in Singapore to their head offices and other such overseas branches for data processing purposes.

The Bill also proposes that the Goods and Services Tax Act be included in the definition of "written law" under section 47(11) of the Act so that banking secrecy may be lifted for investigation and prosecution of offences under the GST Act.

Other than the above amendments, the Bill also contains a number of other house-keeping amendments to the Act merely to give the force of law to administrative procedures. These amendments 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.

Dr Ow Chin Hock (Leng Kee): Mr Speaker, Sir, the Banking Act was amended in 1993. Since then, there have been a number of incidents which have rocked the world's financial markets, such as the collapse of Barings, the Daiwa Bank scandal in the United States and the Mexican peso crisis. Even though the Barings collapse was triggered off by losses incurred by its futures subsidiary in Singapore, Singapore's financial sector was virtually unscathed, largely because of our sound financial system and the high prudential standards we have imposed on financial institutions operating here.

Over the years, financial markets have become increasingly interdependent and more competitive. More innovative and sophisticated financial derivatives are being traded in increasing volumes. While these developments have raised the relative importance of the financial sector in the economy and improve the efficiency of the financial markets, they have also generated greater volatility and risks for banks and other market participants. Singapore's financial sector has also grown in sophistication and our financial institutions will also be subject to greater risks as they venture further abroad. While we should continue to develop Singapore as an international financial centre, we should not compromise our prudential standards to ensure the integrity of our financial markets. There must be a proper balance. Liberalisation of our financial markets should only be undertaken hand-in-hand with adequate regulations.

Sir, now let me turn to the specific provisions of the Bill. Clause 3 seeks to raise the minimum capital funds requirement of Singapore incorporated banks to S$1,500 million. In the 1993 amendment to the Banking Act, the minimum capital funds requirement was raised to S$800 million. I had already asked then why the requirement was set at that level, and not higher, as nearly all the local banks at that time had exceeded the S$800 million requirement. I have great pleasure to tell the Minister that I told him so three years ago.

Further, as the Singapore banks continue to expand their operations overseas, it is important that they have adequate capital resources to support such expansion, and to withstand any potential adverse developments which could result in losses to their operations. I therefore have no difficulty in supporting this further increase of the minimum capital funds requirement to S$1,500 million.

I note that the Minister has said that only two local banks have some difficulty in meeting the new requirement. May I ask the Minister whether the banks would be able to meet the new requirement within five years? I would also like to ask the Minister whether he would consider providing any incentive to encourage the smaller Singapore banks to merge among themselves or with the larger banks to achieve economies of scale, and thereby improve efficiency. I would also like to ask: with this increase in capital funds, what will be our capital adequacy ratio, and how does this ratio compare with other financial markets?

Clause 5 of the Bill inserts a new section 45A to allow foreign supervisory authorities to conduct on-site inspections on Singapore branches of banks incorporated under their jurisdictions. This will enable them to undertake more effective consolidated supervision over their banks' overall operations.

The recent occurrences of fraud and mismanagement by the overseas offices of some foreign banks, eg, the US$1.1 billion fraud in Daiwa Bank's New York Branch, have highlighted the importance for supervisory authorities to undertake closer supervision over their banks' overseas operations.

I note that a number of financial centres already allow foreign supervisory authorities to conduct inspections on the branches of foreign banks operating in their jurisdictions. I therefore support this provision under clause 5. Sir, given the large number of foreign banks with branches in Singapore, this provision will enhance the level of supervision over the Singapore banking sector and help to reduce the risk to our depositors and investors.

However, we cannot depend solely on the foreign supervisory authorities to supervise the operation of their banks here. The foreign supervisory authorities may not fully appreciate our local operating environment, and the focus of their inspections may also differ from that of the Monetary Authority of Singapore. MAS, therefore, cannot afford to be less vigilant in supervising the foreign banks in Singapore. But may I ask the Minister: in the event of differences or even conflict between MAS and a foreign supervisory body, which agency will prevail or take precedence? In this context, Clause 7 of the Bill inserts a new section 46A to safeguard the confidentiality of reports produced by MAS or a foreign supervisory authority upon supervision or investigation. May I ask the Minister to further elaborate on these safeguards to maintain the confidentiality so as to ensure that depositors' and investors' confidence in our banking system is not compromised.

Lastly, clause 8 of the Bill also proposes to amend the Banking Act to allow the Singapore branches of foreign banks to transmit information to their head offices or other overseas branches for data processing. I support this proposal as it would help to reduce the operating costs of foreign banks in Singapore, thereby making Singapore more attractive as a location for foreign banks to set up or expand their operations here.

Sir, apart from these queries, I fully support the Banking (Amendment) Bill.

Mr Lew Syn Pau (Tanglin): Mr Speaker, Sir, before I begin, I would like to declare my interest as a banker. I would also like to say that the views I express today are entirely personal. I do not represent my bank here or any banking group. Some of these views, however, have been formed after informal discussions with people in the banking community, many of whom have been in banking much longer than I.

The stated mission of the MAS is to promote sustained and non-inflationary growth of the economy, as well as to foster a sound, progressive and competitive financial services sector. The resounding success of Singapore as an international financial centre is testimony to the good job MAS has done in this respect.

The Banking Act has served MAS well thus far in maintaining a sound financial regulatory framework which could withstand incidents like bad debt crises of less developed countries, stock market crashes and even the recent Barings Bank failure without any investor or financial institution in Singapore losing any money. But as the external pressure for liberalisation of our financial services grows, there is a need to review our supervisory system to ensure that we are prepared to manage the greater volatility in the financial markets that may result. I believe this Banking (Amendment) Bill is a step in the right direction, and I support it.

First of all, the provision to require existing banks incorporated in Singapore with capital funds of less than $1.5 billion to increase their capital funds to that level in five years will result in fewer but stronger local banks. This, I believe, is necessary if we intend to compete in a big way in the international market place. The recent mergers of Chase and Chemical Banks and Tokyo and the Mitsubishi Banks are aimed at achieving precisely this. Stronger banks have greater access to quality customers and better cost of funds and can therefore compete more effectively. The smaller banks may have to merge or be absorbed by their parent companies to meet this requirement in five years.

Clause 4 to amend section 26 to shorten the time allowed for banks to submit their monthly statements from 15 calendar days to 10 calendar days is, in my view, reasonable, considering the high level of computerisation in banks today. As a matter of fact, MAS had already implemented the 10-day deadline since February last year through a circular issued to all banks dated October 1994. Generally, banks should have no problems meeting this deadline, except perhaps in months when public holidays and weekends fall within those 10 calendar days. In those cases, I hope the MAS would be understanding and give banks a bit more time to file their returns.

Next, I have some questions regarding the provision to allow, under certain circumstances, a foreign supervisory authority to carry out an inspection of a branch in Singapore of a foreign bank under its supervision. This will give foreign authorities a complete picture for specific audit and investigation purposes. My question to the Minister is: apart from the few countries which have been mentioned, will the foreign authorities of other countries reciprocate and allow MAS to do likewise? If not, will Singapore be disadvantaged vis-a-vis other financial centres where customers' perception of our banking secrecy is concerned? I do realise that the possible access by foreign authorities to their branches' books in Singapore is subject to the approval of MAS and a host of other conditions. But, unfortunately, the fear of compromise of confidentiality is sometimes irrational. I believe MAS and the foreign banks have a public relations task to allay such anxieties of foreign customers. Singapore has grown as an international financial centre because of the confidence instilled in customers through our legal framework. We should do our best to maintain that confidence.

Lastly, the new section 46A provides penalties for unauthorised communication and misuse of such information, in the course of the work of foreign authorities. My last question to the Minister is: how do we enforce these laws on persons who violate this Act who are living in other countries?

Mr Heng Chiang Meng (Cheng San GRC): Sir, I certainly support the Government's move to increase the capital adequacy of banks in Singapore. I also support the move to get foreign supervisory authorities more involved with the affairs of branches of their own banks. Certainly, today in this world where international finance is getting more and more international and, in fact, it is basically one single global financial community, this is important. But, Sir, I remember that in the past MAS has not been very receptive to such ideas because of its banking secrecy provisions. In line with the new mood, especially that started by the Swiss authorities, I believe the mood now is towards a more open and more transparent supervisory climate. However, given the provisions that have been enacted regarding the banking secrecy in Singapore, I also believe that MAS sets great store in the development of our financial centre.

Sir, in this respect, I would like to ask the same question that the Member for Tanglin has asked, ie, if perchance, information is released by foreigners in other countries, what are the practical steps and avenues that are open to us to seek redress? The presence of such provisions prohibiting such release in our own statutes would not really go too far away if this information is being released in the foreign domain.

Dr Richard Hu Tsu Tau: Sir, Dr Ow has asked whether the local banks will have any difficulty in meeting the minimum capital requirement proposed. Of the six major local banks, four have capital funds, as I have mentioned, which are more than $1,500 million, and they range from $2.6 billion to $5.6 billion. The other two have capital funds of $1.13 billion and $1.03 billion, and should be able to meet the new capital requirement within five years. There are six other local banks which are all subsidiaries of the major local banks. For those banks which are at least 75% owned by the parent banks which are able to meet the new capital requirement, the authority may extend the grace period beyond five years for these smaller banks. However, as I have mentioned in my speech earlier, the authority would encourage these banks to merge with their parent banks in order to make better use of their resources and to enjoy the benefits of economies of scale. For those banks which are less than 75% owned, they may have to be merged with their parent banks at the end of the grace period if they are still unable to meet the new requirement.

Dr Ow also wants to know whether the MAS would provide incentives to encourage the smaller Singapore banks to merge among themselves or with the larger ones. Members may recall that in the last amendment to the Banking Act in 1993, new provisions were introduced to facilitate the merger of a bank with one or more of its fully-owned subsidiary banks. This was as a result of feedback from local banks that the provisions for mergers and takeovers in the Companies Act posed 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. The Banking Act was therefore amended to allow banks to apply to the Minister for Finance for approval to merge with one or more of its locally wholly-owned subsidiary banks. Once approval is granted, all undertakings of the existing banks will be transferred to and vested in the merged bank, allowing the merged bank to carry on business with minimum disruption and inconvenience to depositors and customers.

Since the amendment in 1993, one of the big four local banks, UOB, has made use of the provisions to merge with one of its subsidiary banks, the Lee Wah Bank. The MAS will continue to encourage the subsidiary banks of other banks to merge with their parents in order to make better use of their resources. In this regard, I think the MAS will be pleased to consider removing any other impediments which banks foresee may prevent such mergers.

Dr Ow also wants to know what are the capital adequacy ratios of the banks with this change in capital funds. Under the Banking Act, the local banks are required to have minimum capital adequacy ratios of at least 12%. However, at the end of April 1996, the capital adequacy ratios of the six major local banks already ranged from 13.4% to 17.7%, based on Tier 1 capital, which is paid-up capital and published reserves. These capital adequacy ratios of our local banks are among the highest in the world, making them among the strongest banks in the world financially. The increase in the minimum capital funds requirement should not have any impact on the capital adequacy ratio of the big four banks as they are already able to meet the new capital funds requirement. As for the other two smaller banks, their capital adequacy ratios would likely improve as a result.

Dr Ow also wants to know who would prevail if there is a perceived conflict between the views of MAS and the foreign supervisory authority. Undoubtedly, in Singapore, the MAS would prevail on local banking matters.

He also wants to know what safeguards would be introduced to maintain the confidentiality of bank depositors information. The following are the safeguards which are available:

Firstly, a foreign supervisory authority which intends to conduct an inspection of its bank's operations in Singapore must obtain MAS' prior permission. Secondly, the inspection must be solely for supervisory purposes and must be conducted under conditions of secrecy. Thirdly, the foreign supervisory authority must be prohibited from its domestic laws from divulging information obtained from the inspection to other parties. If not, the foreign supervisory authority would have to give an undertaking to MAS not to divulge the information to third parties. Fourthly, the foreign supervisor would have to give MAS a written undertaking to comply with the provisions of the Banking Act and any conditions which the MAS may impose.

Finally, the foreign supervisory authority would only be allowed to examine the credit facilities and internal control systems of the bank with the prior approval of MAS. Other matters would not be allowed unless MAS' prior approval is obtained. It is quite clear that they would have no access to individual depositor information.

Mr Lew Syn Pau asked whether we are the first country to introduce the legal provision to allow foreign supervisory authorities to inspect banks here. The answer is no, we are not the first country to allow foreign supervisors to inspect the banks' operations. As I have mentioned in my speech, other countries such as US, UK, Australia and Hong Kong have already allowed home supervisory authorities to inspect foreign banks operating within their jurisdictions. As such, Singapore would not be disadvantaged vis-a-vis these countries.

MAS would only consider allowing foreign supervisory authorities to inspect their banks' operations inside Singapore if they are prepared to allow reciprocal treatment when we ask to do so.

Finally, both Mr Lew and Mr Heng Chiang Meng were concerned how we would deal with situations in which foreign persons living overseas divulge confidential information to which they had access. In the first place, we must ensure that the information which can be divulged should be limited. In other words, such persons would not have access to depositor information anyway. So there is nothing to divulge in that area.

As far as our ability to catch and prosecute them is concerned, if they are not in Singapore, we have limited means. If the person is a Singapore citizen, depending on the nature of the offence and availability of extradition laws, we would try to extradite him. If he is a foreign person, non-citizen, living overseas, we can only prosecute him in absentia and hope that he comes here and visits us some time in the future.

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