BANKING (AMENDMENT) BILL

Order for Second Reading read. 1.49 pm

The Deputy Prime Minister (BG Lee Hsien Loong): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

In the past few years, the Monetary Authority of Singapore (MAS) has progressively changed the way it supervises the financial sector. Our objective of ensuring financial stability is unchanged. But in order to have a more dynamic and vibrant financial sector, we have shifted emphasis from regulation to supervision. We have moved away from one-size-fits-all laws and regulations, towards tailored supervision of individual institutions according to each institution's financial strength, risk management capability and risk profile.

The most important changes have been to the banking sector. Banking is not just the biggest industry in the financial sector. A sound and dynamic banking system is critical to financial stability and to the entire economy. We need to attract quality international banks and, at the same time, build up strong local banks able to compete against the best.

In May 1999, MAS launched the first phase of the liberalisation of the banking sector. We introduced greater foreign competition, removed foreign shareholding limits on local banks, and raised standards of corporate governance and disclosure. We required banks to form nominating committees to vet key appointments of directors and top executives.

In June 2000, we required banks to separate their financial and non-financial businesses, and unwind the cross-shareholdings within the local banking groups. This was to limit the risk of contagion from non-banking businesses to banks, improve the banks' corporate governance, enhance transparency of transactions and market discipline, and ensure that bank managements focus their attention on the complex business of banking in an increasingly competitive environment.

Besides these major initiatives, we have been updating and streamlining many banking regulations, for which the underlying objectives are either no longer valid or not being effectively met. We have amended rules to give banks greater business and operational flexibility without compromising prudence. We have also adopted a risk-focused supervisory approach that enhances our oversight on banks without increasing their cost of regulatory compliance.

Reviewing our supervisory framework for the banking sector is a continuous process. Several important pieces have been put in place, and more will be done over the next few years. The enactment of the Banking (Amendment) Bill will give legislative effect to new policy changes announced in the past year. The Bill will also introduce several new changes to bring the Banking Act up to date.

In preparing the Bill, MAS has consulted widely with the industry through the Association of Banks in Singapore, and with accounting and legal practitioners. The individual amendments to the Banking Act are explained in the explanatory statement to the Bill. I also circulated earlier a separate Explanatory Note to Members, following the First Reading of the Bill. Today I propose to speak in detail only on the major changes.

Giving Effect To Announced Policies

In terms of giving effect to announced policy changes, I shall discuss three main ones: (1) separation of financial and non-financial activities; (2) revision of ownership rules for local banks; and (3) reduction of paid-up capital requirements for local bank subsidiaries.

First, separation of financial and non-financial activities. New sections 30 to 35 will prohibit banks from carrying out any business which is not banking business, other financial business regulated or authorised by MAS, or business which is incidental to financial business. Business incidental to financial business includes the provision of clearing and settlement services, custody, trustee and nominee services, financial advisory activity as well as agency transactional services where the banks act as agents for third party products but take on no additional risk themselves.

Banks will have to obtain MAS' approval before acquiring a major stake in any company. If the company being acquired carries on non-financial activities, MAS will generally withhold consent, although it may grant approval if, after discussion with the bank, it is satisfied that there are clear synergies with the bank's financial business. Over time, MAS will be able to develop a list of such approved non-financial businesses, so that banks need not seek our approval for each acquisition. The list will naturally have to be regularly updated. The financial industry is rapidly evolving, and it is not possible to define a static list of approved activities.

While banks should not venture into non-financial activities, we do need to allow them some flexibility to own shares in non-financial companies, for portfolio investment purposes. The new section 32 will allow banks to purchase non-controlling stakes (generally 10% or less) in the share capital of any company. To limit concentration risks, the new section 31 will limit equity investments in any single company to 2% of the bank's capital funds, while the new section 33 will revise the rules on a bank's immovable property holdings and lower the limit to 20% of its capital funds.

These restrictions on non-financial business will also apply to the branches of foreign banks in Singapore. Contagion and other risks arising from the co-mingling of financial and non-financial businesses can affect all banks, whether local or foreign. The policy is thus relevant across the entire banking sector.

In addition, the Bill will prohibit a person from using any logo or trademark in a manner that would imply association with a bank incorporated in Singapore or its subsidiaries carrying on financial business, unless that person is a financial affiliate of the bank or its financial holding company. This will limit the reputational and contagion risks from such name-sharing between the bank and its non-financial affiliates.

The Bill will amend section 78 of the Act to enable MAS to make regulations which spell out other detailed requirements on the separation of financial and non-financial activities, including the prohibition on sharing of management between the bank group and its non-financial affiliates, and on cross-shareholdings within the bank group.

These new measures will require local banks to undertake significant corporate restructuring and divestment of non-financial assets. To ensure that the process is undertaken in an orderly manner, the new section 34 will allow banks a three-year grace period, from the time that the new amendments take effect, to divest any investment assets which they hold at that time. MAS has been in close discussion with the banks on their plans and will continue to keep close watch over the divestment process. There is no reason to force the banks to conduct fire sales in a depressed market. This would be detrimental to the interests of banks' shareholders, and might weaken our financial system. But the banks have to act with due despatch within the three-year period, and I am confident that they will do so.

Next, revision of ownership rules for local banks. When MAS lifted the 40% aggregate foreign shareholding limit for local banks, it had also introduced a new shareholding approval threshold of 12%, to be added to the existing thresholds at 5% and 20%. The Bill revises sections 15 to 18, which relate to the approval of controllers of Singapore-incorporated banks, to ensure that control rests with individuals or groups whose interests are aligned with the long-term interests of the Singapore economy and the national interest. The new 12% threshold gives greater flexibility to MAS to allow strategic partners and large institutional investors to reach and cross the 5% shareholding level, without having to also allow their stakes to grow unrestrained up to 20%.

The amended sections will also address passive increases in shareholdings and shareholders acting in concert. Legislative powers will be introduced for the Minister to object to persons who were previously allowed to exceed the threshold levels but who subsequently become unacceptable as significant shareholders.

Next, reduction of paid-up capital requirements for local bank subsidiaries. The Bill provides for a reduced minimum paid-up capital requirement of S$100 million for banking subsidiaries of Singapore-incorporated banks which have themselves met the S$1.5 billion capital requirement. (This will be in a new section 9A to be inserted in the Banking Act.) This was announced in July 2000 as part of MAS' Internet banking policy. The reduced paid-up capital requirement facilitates the setting up by local banks of banking subsidiaries which adopt new business models, such as Internet-only banking. These new banking subsidiaries may be set up together with joint venture partners provided the parent local bank retains control.

New Policy Changes

As for new policy changes contained in the Bill, I shall elaborate on four main ones: (1) revision of banking secrecy provisions; (2) prohibition of unlicensed deposit-taking services; (3) flexibility for MAS to prescribe capital adequacy requirements on a supervisory basis; and (4) revision of methodology for regulating property-related exposure.

Revision of Banking Secrecy Provisions

The banking secrecy provisions of the Banking Act protect the confidentiality of customer information. Tight banking secrecy is important to maintaining the confidence of customers in our banking system. However, our present banking secrecy provisions have impeded banks wanting to take advantage of potential operational benefits and savings. For example, banks find it difficult to securitise mortgage loans, or to outsource data processing to third parties. MAS has reviewed the banking secrecy provisions in consultation with the industry. We have considered both the operational requirements of banks and the need to preserve customer confidentiality. The measures set out in the new section 47 strike a careful balance between these two sets of considerations.

The new section 47 will stipulate a wider set of circumstances under which banks can disclose customer information, and the terms of such disclosure. These are set out in a new Sixth Schedule, which consists of two parts. Part I will contain many of the existing exceptions, and Part II will contain most of the new exceptions to the secrecy provisions. Examples of new exceptions are the disclosure of credit information in a sale or transfer of credit facilities (for example, asset securitisation), and the disclosure of customer information to a bank's head office for risk management purposes. Two key points about the new exceptions are, first, only very few exceptions have been allowed for the disclosure of information relating to a customer's deposit and funds placed for investment; and second, a person who receives customer information will be required by law to keep the information confidential.

These measures ensure that by law, all banks will provide a basic level of customer confidentiality to all their customers. Beyond this legal minimum, individual banks and customers may reach their own contractual arrangements offering higher standards of confidentiality. The Act does not compel a bank to invoke the newly introduced exceptions if the bank deems this to be in the best interests of its business and its customers.

Prohibition of Unlicensed Offering of Deposit-Taking Services

The taking of deposits is an integral part of banking business regulated under the Banking Act. However, under current provisions in the Banking Act, deposit-taking on its own is not a regulated activity. A company is only considered to be conducting banking business if it carries out three related activities - deposit taking, extending loans, and providing customers with chequing facilities. Hence, a company set up to take deposits in Singapore which does not also grant loans and provide chequing services would not need to meet MAS' licensing requirements or abide by the Banking Act.

But new business models have emerged in the changing banking industry. Some banks now operate using an Internet-only strategy. They take deposits but do not extend loans, yet there is no doubt they are banks, and need to be regulated like banks. We therefore need to update the legislation.

The Bill will introduce new sections 4A to 4C to generally restrict deposit-taking in Singapore in the course of a deposit-taking business to institutions licensed by MAS or specifically exempted. The new provisions will also prohibit offers, invitations and advertisements to the public in Singapore to place deposits with any deposit-taking business. Again, this does not apply to institutions licensed in Singapore or specifically exempted.

These new rules will accord the public a measure of protection. But they do not prevent anyone from seeking out on their own, via the Internet or other means, the services of financial institutions operating overseas. Persons who choose to do so take their own risks.

I also wish to assure the House that the new provisions are not meant to restrict capital market fund-raising by corporations which are not carrying on deposit-taking business. Such companies issue bonds and notes from time to time, and these will generally not be considered deposit-taking business. Where necessary, MAS may make further exemptions to clarify that capital market fund-raising activities are not restricted by the new provisions.

Flexibility for MAS to Prescribe Capital Adequacy Requirements on a Supervisory Basis

Section 10 is amended to enable MAS to impose, on a supervisory basis, specific capital requirements over and above the statutory minimum that apply to all banks, and specific capital adequacy ratio requirements that vary from the stipulated minimum of 12%. This amendment allows MAS to impose capital requirements appropriate to an individual bank's risk profile and management capabilities. This risk-focused supervisory approach is being increasingly recognised and followed by regulators in other key financial centres. After the enactment of this amendment, MAS will engage each bank in an ongoing consultative process to determine the appropriate level of capital that it should maintain.

Revision of Methodology for Monitoring Property-Related Exposure

It is important to effectively monitor and limit banks' exposure to the property sector in order to minimise the vulnerability of the banking system in a property market downturn. Section 34 of the existing Banking Act limits loans secured by "immovable property for the purpose of purchasing, improving or altering" that property to 30% of the bank's deposits in Singapore. This statutory requirement will be repealed and replaced by a section empowering MAS to make regulations to limit banks' property-related risk.

This is another facet of the risk-focused supervisory approach. In some jurisdictions, the law does not prescribe any limits to the exposure of banks to the property market. It is left entirely to regulators to exercise supervisory discretion. In Singapore, a major part of the banks' lending comprises loans that are directly or indirectly related to property. This is because of the structure of our economy. Many manufacturers are MNCs who depend on their own sources of financing rather than on local banks. Rather than leave the matter entirely to the discretion of the regulator, we have decided that the Banking Act should explicitly spell out the scope of MAS' supervision of banks' property exposure, while leaving the specific approach and degree of tightness to MAS' judgement.

Upon the enactment of the Bill, MAS intends to implement, via regulations, a new methodology to monitor and limit property-related exposure. The old methodology is unsatisfactory in several ways.

First, it only limits loans secured on immovable property, and fails to capture loan exposures to the property sector that may not be secured on property, for example, a general loan to a property developer. The new methodology will impose a limit on all loans and debt instruments for the purpose of property development or investment, whether or not it is secured on immovable property.

Second, the old methodology limits property exposure to a proportion of the bank's deposits. But deposits can be inflated by borrowing via the inter-bank market. The new methodology will limit property loans to a proportion of the bank's total non-bank loans and debt instruments. This encourages healthy diversification in the bank's loan portfolio.

Third, the old methodology includes owner-occupied housing loans secured on the property. The new methodology excludes owner-occupied housing loans from the limit, recognising that its risk of default is lower than other property loans. Owner-occupied housing loans will be subject to separate supervisory limits where warranted, according to the circumstances of each bank.

MAS intends initially to set the limit on banks' property exposure at 35% of its total loans and debt instruments. The main banks are all currently below this limit. For the handful of smaller banks which currently exceed the limit, MAS will grant them a short grace period to bring down their ratios.

To avoid any misunderstanding that this change is intended either to tighten or loosen bank lending to the property sector, let me state explicitly that this is not the case. Our aim is rather to enable MAS to more accurately monitor and limit banks' exposure to the property sector. Whether the 35% limit will be tightened or loosened in future is an entirely separate policy decision that will be considered in the future, and will depend on our view of the risk profile of the banking sector, and our view of the risks in the property market at that time.

Other Amendments

I would now like to take the House through the rest of the amendments that will be made in the order that they appear in the Bill. These include:

Adjustments to the provisions in section 9 on capital requirements for foreign banks to allow the bank's issued and paid-up capital or its equivalent, and the bank's reserves, to count towards the S$200 million capital requirement;

The repeal of the rule in section 24 prohibiting payment of dividends by banks until all capitalised expenditure is written off. This is in line with new accounting standards that require goodwill to be amortised over a number of years;

The repeal of provisions in section 25 empowering MAS to determine the form in which a bank publishes its accounts. This is no longer necessary because MAS does not prescribe the form of presentation, verify the accuracy of the accounts or decide on any other details in relation to the bank's accounts. This is and should remain the responsibility of the Board of the bank and the bank's external auditors;

Amendment of section 62 to clarify that Singapore-incorporated banks are able to issue subordinated debt that qualifies as regulatory capital;

The updating of penalties in the Banking Act to underscore the importance of sound prudential standards. In general the penalties have been multiplied by a factor of 5. This is not excessive considering that many of the penalties have not been revised since 1984, and some have been unchanged since 1970.

Conclusion

Mr Speaker Sir, these amendments to the Banking Act will implement key measures to strengthen MAS' risk-focused supervision of the banking sector, upgrade the local banks, and provide all banks with greater operational flexibility. MAS is currently reviewing policy changes to other areas of our supervisory framework. A new Banking (Amendment) Bill will be tabled once the next major pieces are ready, probably next year.

Sir, I beg to move.

Question proposed.

Mr Leong Horn Kee: Mr Speaker, Sir, I would like to start by stating explicitly that I support all the provisions in this Banking (Amendment) Bill. The amendments are positive as they generally strengthen the regulatory and legislative structure of the banking industry.

These amendments pertain to stronger prudential safeguards and corporate governance, greater operational flexibility and facilitating risk supervision of the banks. As said by the Deputy Prime Minister BG Lee, who is also the Chairman of MAS, these changes will ultimately benefit depositors and shareholders, and strengthen the financial system as a whole.

The new rules that I particularly like are:

(1) Separation of financial and non-financial activities of local banking groups, and the 3-year grace period for the divestments to take effect.

(2) The revision of ownership rules.

(3) Revision of methodology of monitoring property-related exposure.

(4) Prohibition of unlicensed offering of deposit-taking services.

(5) Changes to the capital adequacy requirements.

Arising from these amendments, I have the following clarifications and queries which I wish to pose to the Deputy Prime Minister.

First, on the overall consolidation and merger of local banks. The Government has expressed the wish to see faster consolidation of local banks, so that they can achieve greater size and bulk, to be better able to compete regionally and internationally. I would like to ask the Deputy Prime Minister whether the Government is happy with the current pace of restructuring and consolidation of local banks.

In the process of consolidation, I would like to urge the Government not to forget the small SMEs and small depositors. Bigger banks mean that they will target for and concentrate on the big customers. Hence, I am concerned that the smaller customers and depositors may be neglected, and given poorer service. This is evident in the merger of DBS Bank and POSBank. There have been instances recently where the small depositors have to suffer a significant drop of the service standards and an increase in the charges imposed on them. I would therefore urge the Government or the MAS to be mindful of these developments.

Second, the prohibition of unlicensed offering of deposit-taking services. This restriction is targeted mainly at entities that are offering deposit-taking services through the Internet. I would like to ask the Deputy Prime Minister how the Government could regulate Internet banking entities that are not domiciled in Singapore, and therefore not subject to MAS' licensing and rules. I recall that about two years ago, there was an Internet bank started in the UK called EGG.com. This company offered better interest rates to attract depositors and managed to amass 7 billion pounds of deposits within one year. If such Internet banking companies were to lure Singapore depositors with substantial higher interest rates and other benefits, some Singaporeans and residents may fall for it. How do we regulate and control such Internet banking operators who are not operating within Singapore, but attract deposits from overseas?

Third, flexibility for MAS to prescribe capital adequacy requirements. The present Banking Act requires local banks to maintain a minimum capital adequacy ratio (CAR) of 12%. The new amendment will allow MAS to prescribe CAR on a consultative basis. This is a meaningful flexibility which MAS can decide to impose lower CAR for the stronger local banks which are therefore better able to take a higher risk profile so as to compete internationally. For instance, I understand that the Basel Accord only requires a 8% CAR. However, we have to be aware that if the CAR on some local banks is lowered, would the depositors be subject to higher risk?

On the contrary, MAS may decide to impose higher CAR for the smaller local banks. I would like to ask the Deputy Prime Minster whether or not, in this case, MAS is setting uneven standards and rules on CAR for the various local banks, thereby creating an unlevel playing field between the local banks.

Sir, these are some of my queries and questions. May I conclude by stating that I fully support this Bill.

Mrs Lim Hwee Hua (Marine Parade): Mr Speaker, Sir, I rise to support the Banking (Amendment) Bill which seeks to effect changes to revised and new policies and measures. These will help position Singapore banks better in ever changing circumstances that will require and reward greater operational flexibility. At the same time, we should continue to have the assurance that banks meet minimum prudential limits in order to preserve the integrity of the Singapore banking system, something which we have painstakingly built up over the years.

Sir, the changes cover a wide range of issues but I would like to limit my comments to the following three areas, namely, capital adequacy, property exposure and banking secrecy.

Firstly, capital adequacy of banks. It is a well-known fact that unlike banks elsewhere which are found wanting during an economic downturn, Singapore banks are well-capitalised. In fact, for many years, the main grouse of institutional investors in banking stocks has been that Singapore banks are over-capitalised. Hence, their returns on capital would pale in comparison with those of comparable banks elsewhere.

Sir, in recent years, capital efficiency has figured prominently and banks have sought other ways of funding their activities whilst reducing the capital base. Notwithstanding that, banks here still generally keep a capital adequacy ratio (CAR) well above the MAS' minimum of 12%, which is itself already higher than 8% imposed by the Bank of International Settlements (BIS) on all banks. According to published data, the average CAR of the top five locally owned banks ranging from 16% to 24% was 19% in year 2000. Thus, the proposed flexibility for the MAS, in clause 12, to set bank-specific CAR above its relatively high 12% minimum, runs the risk of being seen as an over-kill unless the circumstances for such an imposition, such as the innovation of new but riskier activities, are well understood.

Moreover, Sir, our local CAR standards must always be seen in the context of regional or even international competitiveness as well as the ambitions of Singapore banks to expand offshore. Imposing higher standards for Singapore banks may unwittingly limit the ability to compete meaningfully as their threshold returns would be much higher.

However, as the intent behind the introduction of flexibility is a sound one, I would like to urge the MAS to constantly review its 12% minimum level with a view to lowering it to reward banks for good behaviour, that is, banks who are themselves using internal models to calculate risk so as to calibrate the amount of capital they must set aside. This, I believe, would be consistent with the spirit of the new Basle 2 framework.

Secondly, property exposure. Sir, the changes outlined in clause 22 attempt to help minimise the contagion effect of a property market downturn through a more meaningful definition of property-exposed loans. Whilst the re-definition will effectively broaden the coverage to include loans to building and construction, the increase will be offset to a large extent by the exclusion of owner-occupied property loans. Hence, lending capacity should not be materially affected.

Sir, this exclusion of owner-occupied property loans is well-founded and intuitively logical. But I note that it is a slight departure from the convention of attributing lower rates to mortgages in general, regardless of whether they are owner-occupied or not. The question of enforcement comes to mind, as an owner-occupied property may turn into an investment during the tenure of the loan. How would the banks, and the MAS as supervisor, know when there is such a change? If left unchecked, would the real property exposure be understated over time?

Thirdly, banking secrecy versus the convergence of retail businesses. Sir, here, the amendment seeks to grant banks more operational flexibility whilst guarding the confidentiality of customer information. This is significant on two counts, as the DPM has elaborated. Firstly, it will allow outsourcing of functions to intermediaries who may enjoy greater economies of scale than the banks themselves, for example, backroom processing of credit cards or the provision of non-sensitive banking services which does not involve data handling. This will enable banks to focus on what they do best in the whole value chain.

Secondly, and more importantly, it will facilitate the extension of cross-marketing capabilities to promote financial products and services as outlined in the Sixth Schedule. Again, as banks cannot be experts across a wide spectrum, cross-marketing to help broaden consumer choice must be allowed as far as possible.

This will take special significance on the Internet platform in the light of increasing customer demand for speedier processing. For example, in the area of e-payments, we read of Citigroup's use of the MSN portal or the emergence of PayPal, which is posing some competition to credit card companies like Visa and MasterCard. However, convergence will not be limited to the electronic medium and a one-stop banking-cum-services point may soon be the model for customer satisfaction.

In due course, with convergence and the exciting possibilities of cross-marketing beyond financial institutions to overlapping customer segments, the question of selectively extending banking secrecy requirement has to be addressed. An appropriate balance has to be struck between reaping synergies and unbridled use of confidential customer information. Even the imposition of a non-disclosure obligation will have limited practical effects. Hence, any extension should be contemplated only on a selective basis. I would like to ask the Deputy Prime Minister what are the MAS' thoughts on the possible extension beyond financial institutions in these circumstances.

On that note, Sir, I support the Banking (Amendment) Bill.

Mr Ong Kian Min (Pasir Ris): Sir, I support the Banking (Amendment) Bill as I believe the policies and measures encapsulated in these amendments to the Banking Act will enhance our position and reputation as a credible financial centre.

However, I have two main concerns to raise and would like to seek clarification from the Deputy Prime Minister. My first concern relates to Internet-only banks and the second relates to revision of the banking secrecy provisions.

Internet-only Banks.

In July 2000, the Monetary Authority of Singapore issued an Internet banking policy statement that allowed a reduction of the paid-up capital requirements for local banking subsidiaries from $1.5 billion to $100 million. This is now covered in clause 11 of the Bill by introducing a new section 9A to the Act.

It was stated in the MAS policy statement that one of the reasons for this reduction in capital requirements was to facilitate the banks' adoption of new business models, such as Internet-only banking. The MAS also recognised that two broad business models had emerged that a bank could consider in implementing its Internet banking strategy. One was through Internet banking facilities within the existing bank, and the other was through a stand-alone entity, such as Internet-only banks (or IOBs). I have a concern about the second model.

I fully agree that to survive in this fast changing world, a company must be nimble, innovative and quick to change to respond to challenges in its industry. I also agree that Internet banking has the potential to improve services for the public. But I would like to ask, in the context of our local banking industry, is Internet-only banking so crucial that it warrants a reduction in the paid-up capital requirements from $1.5 billion to $100 million? Could not the existing banks achieve their Internet strategy and compete equally effectively by offering its banking services through the Internet directly? Do we have to have this special emphasis so as to encourage the setting up of Internet-only banks?

Sir, the use of the Internet is only a means of delivering a company's products and services to its customers. Whether these products are toys, books or banking services, many of these Internet-dependent business models have not been proven to be sustainable in the long run. For toys, I am reminded of e-Toys which has folded up but the good old Toys-R-Us is still around. And, in the light of the recent NASDAQ meltdown, people are now more enlightened and sceptical about the viability or non-viability of a pure Internet-only business model.

When the MAS issued the policy statement in July 2000, NASDAQ was then in the first phase of its long and painful decline. Now that almost a year has passed and many once high-flying Internet or dot-com companies with much higher capitalisation than $100 million have run out of cash and crashed, I would like to ask the Deputy Prime Minister whether there should be a re-think on this issue of promoting Internet-only banks. S$100 million do not seem like a lot of money when the company has to invest in building the infrastructure and to advertise aggressively to attract traffic. And banking products and services are definitely more important to us than toys.

The business risks faced by Internet-only banks are no different from other companies. The MAS July 2000 policy statement recognised these risks and cautioned that "unlike other Internet ventures, banks can ill-afford to incur losses for long start-up periods". The policy statement also highlighted liquidity risk resulting from price-sensitive customers moving their deposits electronically from one bank to another to take advantage of a marginal difference in rates. This is compounded by the convenience of conducting Internet transactions and may cause an electronic run on the bank.

One of the reasons for companies to set up a subsidiary for a new business venture is to limit the liabilities and exposure arising from that venture. Notwithstanding that the parent Singapore incorporated bank will retain control and letters of undertaking will be required from the Singapore bank and any alliance partners to pledge their support, in a limited liability company, the shareholders' liabilities are limited to the extent of the capital they have put in. The letter of undertaking is usually not binding. But if the intention is to make it binding, it would effectively mean that alliance partners are guaranteeing the liabilities of the banking subsidiary. In that case, how would it help in removing the obstacles to our banks adopting new business models?

So if the rationale is to facilitate the adoption of new, but untested, business models, I believe there are other operational structures and forms of collaboration that can be explored to provide the banks with the same level of operational flexibility and yet afford the customer of the so-called banking subsidiary better protection. With banking subsidiaries licensed as banks and permitted to offer a whole host of traditional banking services and products, my concern is on how the bank's customers will be protected in the event that it runs out of cash and folds up. Will such a bank collapse affect the banking industry on the whole and our reputation as a financial centre?

Revision of banking secrecy provisions

Sir, on this point, I have two concerns. The first is paragraph 3 in Part II of the Sixth Schedule that permits disclosure of customer information in connection with the performance of operational functions of a bank where such operational functions have been out-sourced. Under this exception to banking secrecy, the disclosure can be made to any person, whether inside or outside Singapore, who has been engaged by the bank to perform the out-sourced functions. These persons would probably be located in a lower cost jurisdiction, such as the Philippines or perhaps Bangalore IT Park, as that makes commercial and financial sense to the bank.

My question is: what if these companies become insolvent and bankrupt? We have heard of bankrupt dot-com companies becoming the target of a takeover for their valuable databases of customer information and of cash-strapped companies offering their customer database for sale to raise cash. What is to prevent otherwise-secret customer information from falling into the wrong hands through the sale of the database by a cash-strapped foreign contractor? What can we do to prevent or stop such a sale of information in a foreign jurisdiction? Could the Deputy Prime Minister please elaborate on the nature and types of conditions which may be specified or imposed by the MAS to prevent such events from happening?

Further, in view of the risk of leakage of banking information through foreign companies which are undertaking out-sourced functions, I believe that more measures should be put in place to counter this risk. My thinking is that the penalty of $250,000 under new section 47(6) for any corporation which contravenes new section 47(5) by disclosing the customer information is grossly insufficient in relation to the value of the customer database at hand. Further, I am unsure how this penalty can be enforced extra-territorially against a foreign company in a foreign jurisdiction.

The second area of concern is on paragraph 9 of Part II of the Sixth Schedule that allows disclosure of the customer's name, identity, address and contact number if such disclosure is solely in connection with the promotion to the customers of the bank in Singapore of financial products and services made available in Singapore by any financial institution which is licensed or otherwise regulated by the MAS. I presume this is to facilitate the promotion and sale of financial products, such as credit cards, insurance policies, foreign currency deposits and unit trusts, offered by other financial institutions apart from the bank itself.

I would like to ask what the rationale is for introducing such a blanket exception to our banking secrecy laws. Instead of having this blanket exception, I think a better way would be for the bank to ask its customers, either by way of a newsletter, customer survey or other means of communication from time to time, whether they would like to receive promotional materials and information on other financial products and services. This would be an "opt-in" system. If the customer wishes to know about these other products and opts in, he would have signified in writing his consent to the bank disclosing his name, identity and other contact particulars to the other financial institutions which can then contact him. This consent would be sufficient to permit disclosure as covered under the first paragraph of Part 1, ie, where the disclosure has been permitted in writing by the customer.

Such a position is in fact commonly adopted by many reputable on-line vendors where they state clearly in their personal privacy policy that they will not sell or distribute any personal information about the customer to any third party and the customer is assured that he will receive promotional materials only when he requests that the vendor sends that information to him. Additionally, the customer may take his name off the list at any time and the vendor will immediately cease delivery of the promotional materials to him.

I am therefore surprised that a customer of a bank should run the risk of his name and contact particulars being circulated to other financial institutions. I fear this will open the floodgates for name lists of bank customers to be swapped and exchanged among financial institutions, leading to all of us being inundated with more junk mail and cold calls, and not to mention a loss of privacy and confidentiality.

Sir, I support the Banking (Amendment) Bill and hope that, in its implementation, the MAS will take the above concerns into consideration.

BG Lee Hsien Loong: Mr Speaker, Sir, I thank the Members who have spoken for their support for the Bill, and let me address the points which they have raised, all of which are valuable.

First, Mr Leong Horn Kee has asked whether the rate of banking consolidation is fast enough. There has been some progress. DBS has merged with POSBank, but there have been no other mergers in Singapore, as he well knows. But, as I have said, no merger does not mean that nothing is happening. I am sure that the banks are talking to each other and I hope that something will develop as time passes. It is not something which we can do in a hurry. Arranging a match-making is a delicate business. One has to find the right partner and reach the right terms, otherwise it can end unhappily, and it is MAS' job to make sure that unhappy outcomes are kept to a minimum. So we will foster their consolidation but it will take a little bit of time.

As for small companies and small depositors who may be affected by the consolidation of banking, this is an issue which we have discussed several times in this House. It is naturally of considerable concern to Members. DBS-POSBank is a major example, but there will be others because further consolidation will take place and further adjustments will become necessary. So one of the things which we are considering in MAS is whether we should not require many banks in Singapore to provide a basic banking account - not free, but affordable - with specified characteristics, which we can have the Association of Banks discuss and agree upon, so that whoever operates in the Singapore retail banking market will have to provide a service to look after the small depositors. It is something we are considering. We have to make sure that the burden is not too onerous, but we hope to reach a conclusion before too long.

As for Internet banking and how they will be regulated, I completely share Mr Leong Horn Kee's and also Mr Ong Kian Min's scepticism about the risks of Internet and the hype about the dot-com euphoria which was very strong 12-18 months ago but is now substantially evaporated. I think it is right for us to allow a certain degree of experimentation by our banks, but in a cautious way. And one of the things which we have allowed is to say, "You may set up a subsidiary, only $100 million paid-up capital, and you can use that subsidiary to carry out Internet banking or all other banking activities, or form a joint venture with a foreign partner."

$100 million is not a small sum of money. Our overall requirement for bank capital is $1 1/2 billion paid-up, but that is at the top level. To require the subsidiary of a bank also to have $1 1/2 billion tied up is not reasonable. In most other jurisdictions, one can set up a bank with much less capital than that. In the UK, it is only five million Euros, which is about S$7 million. In Hong Kong, it is HK$150 million, which is only about S$30 million. So our requirement of $1 1/2 billion is many orders of magnitude higher. It is there because we want to be absolutely safe and we also wanted the banks to have a certain critical mass and size. But there is no justification for applying that at the subsidiary level. So we have set the subsidiary level at $100 million, which is still higher than nearly everybody else. If you say that the burn rate will soon burn out the $100 million, I would reply with what one banking supervisor told me, that it makes him very nervous when he reads bankers saying that they are running an Internet bank and it is their business to lose money so as to gain customers. Because when banks start to think like that, trouble is going to come. And so we have a banking framework for Internet banking which puts in adequate safeguards so that if a bank wants to start, it has some flexibility but, before it goes too far, there will be some checks to hold it back.

Mrs Lim Hwee Hua asked about the capital adequacy of banks and whether 12% was not already high, and whether going for even more on a supervisory discretionary basis would be an overkill. 12% is higher than the BIS standard of 8%. That is true. But I would make two points. Firstly, our banks are operating in Asia and this is a less stable environment than the OECD countries and economies. So it is wise to have a bigger capital cushion to deal with the uncertainties of the market. Secondly, although the BIS standard is 8%, nearly all banks in good health have much higher capital ratios than that. Very few banks operate at the margin, with just enough capital as specified by the regulator. So they have 12%-16% capital, enough to have a cushion without being so excessive that it affects their rate of return. I think 12% is about the right figure for us. We may revise it from time to time. We have revised the composition of this 12% already twice to give the banks more flexibility, but it is not in the wrong ballpark.

When will we go above 12%? When we think the bank's risk profile or risk management capabilities or the health of the bank's loan book is such that it better have a bit more capital because, over all, its exposure is riskier. That has to be judged bank by bank. I think the circumstances will be that we will look at the individual banks to decide, and I do not expect very many banks to have additional supervisory impositions placed upon them over and above the general standard. But that will depend on how the practice evolves. With a Basel II framework which is being developed now, banks are moving towards internal risk models of loans, of operational risks, and will depend on these internal risk models to decide how much capital they need, rather than a certain formula set by the regulator. We hope that our banks in Singapore will be able to develop such risk models. They are working at it, but it will take some work and it also requires some pooling of data, because we need to have the track record to have reliable statistics as to how risky the loans are. If they have these risk models and if indeed their track record is good, then, of course, they will be able to save on their capital requirements and this will be to their advantage. So there is a positive incentive, as Mrs Lim Hwee Hua suggested should be done.

On property exposure, Mrs Lim talked about the coverage being broadened because it will include loans to building and construction, and whether this will not be offset to a large extent by the exclusion of owner-occupied property loans. First of all, I should clarify that the coverage is not really broadened, because we are still focusing on property loans, ie, loans for property development. We are not going to impose limits on loans to construction service providers or people who provide building materials, because these are not property developers or property investors. They are providing services, goods. So, similarly, if you are an architect, you are not a property developer but you are providing services to the property developers. Or, if you are a civil engineer, construction engineer or a transport company, you are not in the business. So we are still focused only on property development.

We have excluded the owner-occupied housing loans from our limits on property exposure, but it is not a departure from the Basel approach, which assigns risk weights because owner-occupied housing loans do tend to have a lower risk of default, so they do merit more lenient treatment than other property loans. We are not treating them completely as unrestricted. We will monitor them separately and, if necessary, we will limit them. And one of the limits we now have is to say home-buyers must make a 20% cash payment before they borrow money from the bank and the bank will only lend them 80%. It is a somewhat sore point with the developers, but that is a rule which we have.

As for ownership status, Mrs Lim is right that it is a little bit difficult to find out who is living in a house. HDB has ways of finding out and there are severe penalties. If he is not really living in the house and he is found out, he may get evicted and the house may be re-acquired. If it is a private property, there is no such sanction. But, still, there is a distinction between a loan which is for owner occupation and a loan which is for an investment property. If it is for owner occupation, it is his first house, he is living in it, he is paying for it probably out of his income and, therefore, he is not so likely to default on it, whereas if it is an investment property and he is paying for it out of rental income and he loses his tenant, then he may be unable to service his mortgage. So there is a risk difference between an owner-occupied house and a house purchased for investment purposes.

How will the banks know? The banks presently already ask borrowers to declare, when they want a loan, whether it is for owner occupation, and it is possible that one way is for the banks to regularly ask for a new declaration, and ascertain the position every year. It is not likely to be absolutely foolproof but I think adequate measures can be worked out.

Finally, banking secrecy provisions. I will take Mr Ong Kian Min's comments on banking secrecy provisions first. Mr Ong asked what happens to the database of customer information which has been given to an outsource service provider to process and it goes bankrupt. Can he sell it? The answer is he cannot, because it is an offence under the Banking Act for a party receiving customer information from a bank in the course of performing an outsource function to onward disclose that information. So he cannot go and sell it to somebody else.

If he is overseas, it is a bit difficult for us to enforce, because our laws do not stretch overseas. But before a bank outsources a service overseas, we will want to be satisfied that it is going to somebody overseas which the bank can, in good conscience, have confidence with. And the outsource service provider is in a country overseas where he can have some assurance that the rule of law applies and that it is not just a cowboy environment. These are standard precautions before we allow a bank to outsource its services. They will have to consult us and if there is a regulator on the other side, we will be in touch with the regulator on the other side to reach an understanding on the conditions before we approve. So there are some safeguards.

On contravention of banking secrecy, Mr Ong says $250,000 is not an adequate penalty. It is not a small sum. It is five times bigger than any other penalty that used to be in the Act. It is the biggest penalty in the Act, as it will be amended. If it is still not enough and we need to multiply it by another factor of five, I will come back and ask the House for permission. But I think, for now, $250,000 is adequate.

On sharing information about customers for cross-selling, Mr Ong and Mrs Lim made opposite suggestions. Mrs Lim talked about making it more flexible and allowing cross-selling even to non-financial institutions. Whereas Mr Ong says, "Why do we want to have cross-selling? Why not just restrict it to people who opt in and tick off in a box and agree to have their information shared around?" This is a judgment. It is a trade-off. On the one hand, the banks need the flexibility to cross-sell. On the other hand, the customer wants some privacy. Mr Ong talked about Internet sites invariably asking you whether you want to have your name being circulated around before they give your name to other service providers. I wish they were all so scrupulous. I receive all sorts of junk mail from people whom I never agreed to give my name to, and I am sure so does he. Usually, there is a mechanism to get your name off the list. I think what we need is a balance between the two, a balance which will enable cross-selling to take place without it being intrusive to the customer and without the customer feeling that his privacy has been compromised.

I think there are two things we should do. First, there should be only limited customer information relating to a person's personal particulars which may be disclosed, and only to financial institutions. So, if your banker wants to cross-sell a product of the insurance company, he cannot tell the insurance company, "This is a good customer. He has X number of dollars in his bank account. Please go and offer him a $1 million insurance policy." He can give your name and you may be approached, but he cannot give particulars about accounts, transactions, assets and so on. I think that is not the purpose why people go to the bank in order to manage their money. So it should be only to financial institutions, only personal particulars and, secondly, there has to be an opt-out mechanism. So if I object or I tick off in a box, I will not have my particulars circulated around and not receive junk mail.

We have tried to strike a balance in this legislation. It is a delicate balance. It is not one which is possible for MAS to strike on its own. We have discussed it with the banks very carefully. The banks are comfortable with these arrangements, and that is why I am here before the House commending this Bill to Members.

Dr Lily Neo: Sir, could I ask the Deputy Prime Minister whether there will be a problem of less financing available for home purchasers as a result of this Bill, and whether there will be unloading of properties by some banks as a result of this Bill, and thus adding to the present property glut?

BG Lee Hsien Loong: Sir, as I explained in my main speech, it is not the intention of the changes in this Bill to tighten or loosen bank loans to the property sector. The 35% ratio which we intend to set has been calculated so that nearly all the banks are below this limit. The main banks are all below this limit. There are a few small banks which are above it, but we will give them time to adjust their loans, and I do not think it should have any significant impact. In future, whether we tighten or loosen this limit is a separate matter, which we will address in future when the moment comes. It depends on the circumstances at that time. As of now, we see no reason either to tighten or loosen the state of bank lending to the property sector.

Mr Leong Horn Kee: Sir, the Deputy Prime Minister has not answered a question that I posed in my speech. The supervision of banks using different capital adequacy ratios may lead to unfair rules and an uneven playing field for different banks.

BG Lee Hsien Loong: I am sorry, Mr Speaker, I should have explained. As I said, we expect most of the banks to be on standard rules. But in special circumstances where the banks have special risks, then it is necessary for them to have higher capital adequacy provided for, and we have to set higher limits.

Is it an uneven playing field? Well, it is, because we are dealing with players who are not of equal quality. And if the risk is higher, it is necessary that you carry higher capital. It may be that you are running higher risk and because your capital is down, you are trying desperately to double or quits, and make good. As a regulator, we cannot allow that to happen. Between Singapore banks and foreign banks, even today there is a certain unevenness, because the Singapore banks have to have 12% capital adequacy, whereas foreign banks in foreign jurisdictions have 8% by law and operate under a different regime. So it is already not equal. But as I explained to Members, very few banks operate exactly at the margin. The Singapore banks are all well above the 12% level. The good foreign banks are not only above the 8% level but also above 12% de facto. In fact, capital adequacy has not been a constraint on banks' returns, and has not been a constraint on banks developing and growing their business. I do not think the changes we are making will make the situation any more difficult than it is now.

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. - [BG Lee Hsien Loong].

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

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

Sitting accordingly suspended at 2.56 pm until 3.15 pm. Sitting resumed at 3.15 pm