LIBERALISATION OF BANKING SECTOR TO FOREIGN COMPETITION

Mr Zulkifli bin Baharudin asked the Deputy Prime Minister whether there are other plans to speed up and further liberalise the banking sector to foreign competition following the recommendation of the Monetary Authority of Singapore (MAS) International Advisory Panel.

BG Lee Hsien Loong: Mr Speaker, Sir, the MAS is liberalising the domestic banking sector, to allow greater access to foreign institutions and a freer play of competitive forces. This will achieve three objectives:

First, it will encourage banks to provide efficient and innovative services, comparable to the best available in other major financial centres;

Second, it will nurture a group of robust local banks who measure up against leading international players operating in Singapore and abroad; and

Third, it will encourage strong and well-managed foreign institutions to expand their activities in Singapore, and take a stake in the growth and stability of our financial system.

I announced in July last year that MAS would progressively open up the domestic banking sector over five years. When MAS briefed its International Advisory Panel (IAP) on its plans, the IAP agreed with MAS' policy of liberalisation. The IAP also agreed on the importance of having strong local players after we liberalise. However, the IAP felt that five years was not ambitious enough, and recommended the MAS consider speeding up the process.

The MAS is now working out the specific liberalisation measures and will take the IAP's views into account. It will probably keep the five-year time frame, but take bolder steps in the earlier years. We will announce the programme of liberalisation soon.

The MAS is reviewing all restrictions in the domestic retail sector, including limits on opening additional branches, setting-up off-premise ATMs, participating in shared-ATM networks and offering Electronic Funds Transfer at Point-of-Sale (EFTPOS) services. MAS is also reviewing rules governing foreign banks granted offshore licences, to see how reputable offshore banks can have greater access to the domestic market.

Overall, foreign banks already have wide access to Singapore's banking sector. They compete freely with local banks in wholesale domestic banking, offshore banking, and treasury and capital market activities, but face restrictions in the domestic retail market. Foreign banks account for more than a third of total resident deposits, and 45% of loans to resident borrowers, nearly half. They also account for the vast bulk of the business with non-residents; in fact, 86% of deposits of non-residents and 95% of loans to non-residents. Foreign banks enjoy a larger market share in Singapore than elsewhere in Asia, or in any major financial centre.

Nevertheless, MAS intends to liberalise the banking system further, as this is the best way to upgrade the industry, develop robust local banks, and enhance our role as an international financial centre. We will not open up indiscriminately, and risk the high prudential standards that our reputation depends upon. Instead MAS will provide greater access to foreign banks with strong global track records, sound credit ratings, and a demonstrated commitment to Singapore's financial system.

Market analysts and rating agencies consider Singapore banks the soundest and best in Asia. Our banks operate efficiently, and offer high quality retail banking services. However, the banking environment is being transformed, in the region and globally. Existing franchises and market shares are being challenged. Players who do not adjust quickly and develop new capabilities quickly risk losing their positions altogether.

Competition, not protection, is the only way to develop strong local banks which measure up against the best international players. Our banks must make this leap to make the grade. Unless they gear up now to hold their own against greater competition in an open domestic market, they will not be ready to compete for opportunities in Asia as the region recovers over the next few years.

We hope that more than one Singapore bank will develop a significant presence in Asian and international markets. To do this, Singapore banks must provide innovative and efficient personal financial services comparable to the best retail banks, and strengthen their capabilities in corporate banking and non-traditional, fee-based businesses. No bank can be strong in all areas of banking. Some local banks will choose to specialise. But to compete, they all have to use capital more efficiently, and cut costs by farming out back-room operations that can be more efficiently performed outside, just like the leading international banks do. Most important, they need to attract the best banking talent available, whether locally and abroad, put in place systems to reward and motivate top performance, and build outstanding management teams.

I am happy that several local banks have already announced and started implementing plans to prepare for the new era. They are alive to the changing business environment. I am therefore confident that the liberalisation will result in a more competitive banking industry, stronger local institutions, and better service to customers.

Mr Zulkifli Bin Baharudin (Nominated Member): Sir, I like to ask the Deputy Prime Minister whether there is a need to help local banks now to cope with the consequence of liberalisation that is going to come sooner than later. Do they need Government assistance, for example, to face the competition? Because there is a fear that with foreign competition, they may lose out their market share.

BG Lee Hsien Loong: Sir, I am not sure what the Member means by "assistance to cope with competition". The Government does not operate banks, not even DBS that operates commercially. And the best spur to banks to compete, to upgrade and to improve is competition. You just look at what has happened in the telecommunications business. There was a long discussion just now. It has arisen because we have opened up the market and a tremendous energy has developed, and innovations, new trials. Once in a while, people have to be reined back but it is good that we are reining them back, rather than having to prod them forward.

Banks are slightly different because if there is too much excitement, some mishaps may happen and a lot of depositors will get hurt. So we have to be more careful. What we can do is to give due notice, make our policies quite clear, liberalise, make sure that the rules are fair and not overly onerous to local banks, because sometimes the local banks point out that in some respects, we are even harder on them than on foreign banks. So we have to be even handed and then we have to allow the market to do its work. And if you read what the local banks have been planning, announcing and changing over the last few months, I think that the transformation has begun, because there have been some mergers. DBS has gone with POSBank, Keppel Bank with Tat Lee Bank. There have been changes in their strategies. They have brought in new personnel. They have announced new plans. They have focused on returns to shareholders. They have focused on new services and new ways to deliver these services. I think that competition is doing its work. Singaporeans often say that they should be allowed to flower on their own and, in the next breath, ask what is the Government doing to help them to flower. I think we just allow it to happen.

Dr Toh See Kiat: Will the Deputy Prime Minister clarify if the MAS would prohibit the start-up of a non-bank, not necessarily a foreign player, payment clearing house, particularly for Internet payments?

BG Lee Hsien Loong: It is something we would have to look at carefully. We will have to consider the specific proposal.

Mr Jeyaretnam: May I ask the Deputy Prime Minister whether any check is kept over the increasing charges and fees levied by banks for services?

BG Lee Hsien Loong: Mr Speaker, Sir, there are many banks in Singapore. I think there are four or five big local ones and 20-odd foreign full-licence banks. Any bank which is charging him too much, he should just take his custom elsewhere.

Mr Zulkifli Bin Baharudin: I would like to ask DPM whether there are presently regulatory restrictions preventing foreign banks from tapping on the local ATM network which today is the widest but serving only local banks. If there are, would this be removed or made more accessible to foreign banks?

BG Lee Hsien Loong: The local ATM network is a private sector initiative. The local banks are the shareholders. So it is really up to them whether they will bring in a foreign partner. If he had read their sentiments, I think they are not very favourably disposed to this idea. We do have restrictions on foreign banks establishing off-premise ATM machines. This is one of the things which we will be actively reviewing.

Mr Chuang Shaw Peng (Nominated Member): I would like to ask DPM whether, in the process of opening up the financial sector, he would require the local institutions to meet the same reporting standards as the big international firms that we would like them to operate in Singapore.

BG Lee Hsien Loong: We are doing that already, and a Committee chaired by Mrs Elizabeth Sam last year made recommendations which have been accepted, and which will bring our banks' reporting standards up to the norm in developed countries. They are not quite the very best practices, but the norm in developed countries. The banks have already done that. They have published their hidden reserves which have never been done before. These were treated as top secrets. I see OCBC has announced that they will give details about their land bank which is another old top secret. We are changing.

Mr Jeyaretnam: May I come back to my question? Is the DPM aware that these increases of fees and charges are all, first of all, agreed among the various banks through the Association of Banks and they all implement them?

BG Lee Hsien Loong: Mr Speaker, Sir, I am not sure what fees and charges ---

Mr Jeyaretnam: For services.

BG Lee Hsien Loong: Different banks have different fees and charges imposed. They settle their own. There are a few items which are settled with the Association of Banks. For example, there is an agreement amongst the banks that they will not pay interest on checking accounts. I think that must change and banks will have to be free to do that. It is really up to them what interest they pay. The Member cannot have it both ways. He will remember recently there was a problem with a finance company which was levying a penalty interest on a hawker stallholder whose mortgage was in default. There was a great clamour for the Association of Finance Houses to set the rules and make sure nobody charges too much. Sometimes, the Association has other rules which are not to the liking of the Member. So we have to decide which way we are going to go. In general, the approach should be competition rather than coordination.