DEPOSIT INSURANCE SCHEME

Mdm Ho Geok Choo asked the Deputy Prime Minister and Minister for Finance, with regard to the Monetary Authority of Singapore's proposed deposit insurance scheme, (a) who will be appointed to manage the scheme; and (b) how have other countries operated similar schemes, especially with regard to best practices needed to avoid possible conflict of interest among bankers and banking supervisors who may be represented on the boards of such appointed agencies.

Mr Lee Hsien Loong: Mr Speaker, Sir, MAS has not decided who will manage the deposit insurance scheme. The first phase of the deposit insurance study by MAS focused on issues related to the membership, coverage limit, the size of the fund and how participating institutions will be assessed for premium contributions. Who will manage the scheme will be considered in the second phase of the study.

There are two broad options for managing deposit insurance. One option is to have the responsibility reside within MAS. There is substantial overlap in the interests and responsibilities of a bank supervisor and a deposit insurer. MAS supervises banks to assess their safety and soundness and to minimise incidences of failure. A major part of this supervision involves evaluating the risk profile of institutions - both the health of their balance sheets as well as the strength of their risk management systems and processes. The deposit insurer similarly needs to assess the risk profile of institutions so that it can price the insurance premiums appropriately and take supervisory action to minimise the risk posed by a weak institution to the deposit insurance fund. If MAS administers the deposit insurance scheme, it can leverage on its existing supervisory resources, avoid the duplication of supervisory functions and minimise the burden on institutions.

Another option is to set up a separate organisation with its own governance structure. This approach emphasises the concern that the interests of a deposit insurer and a bank supervisor may not always coincide. A deposit insurer may want to close a weak bank early instead of risking further deterioration in the bank and a larger loss to the deposit insurance fund. The bank supervisor may disagree if there is a good chance that the bank can be returned to health after cleaning up its balance sheet and improving its management. But even under this option where the deposit insurer is separate from the bank supervisor, the two will still need to consult closely and share information with each other.

In the second phase of the study, the MAS will assess the relative merits of the two opposing considerations, and study the practices in other countries, before making a firm proposal on an organisational structure most suitable for the Singapore deposit insurance scheme. The MAS will consult with the industry and other interested parties when the study is completed.

Mdm Ho Geok Choo (West Coast): Sir, in the estimation of the Finance Minister, how much does he envisage that these small depositors need to pay as premium to be covered under such a scheme? What is the prevailing market rate in other countries?

Mr Lee Hsien Loong: Mr Speaker, Sir, the details were contained in the consultation paper which we sent out recently. Speaking from memory, our intention is to build up a deposit insurance fund which will amount to 30 basis points, which means, 0.3% of the amount of deposits insured. But we are not building this up overnight. We are planning to build this up over a period of 10 years, which means a very small levy, 3 basis points a year, over a period of 10 years. But the exact levy will vary depending on the state of the bank and the supervisory assessment of the bank on how risky it is. So the levy will vary from bank to bank, but it will be a small levy.

Mdm Ho Geok Choo: Sir, does MAS have any scheme to protect the deposits of large depositors and what do these other countries do for their large depositors?

Mr Lee Hsien Loong: Mr Speaker, Sir, generally speaking, deposit insurance schemes have a cap. Their purpose is to protect small depositors because they will find it difficult to get enough information about the banks and to make a considered assessment as to which is a safe bank to put their money. Big depositors are expected to make their own judgment and decide where it is safe to put their money and not to vest their savings to banks which are unsafe. This is not just a necessary evil but it is the way the system works. If every depositor can put money, regardless of amounts, into banks, however unsafe and be confident that it will be insured by some deposit insurance scheme, then you have a moral hazard. This means that the depositor does not have to pay attention to whether the bank is safe and the bank is under no pressure to perform and to become a sound bank in order to attract deposits.

Therefore, nearly all deposit insurance schemes got caps. The caps vary. We have set our cap at $20,000 which covers 85% of deposits in Singapore. We think that is sufficient. Some countries have higher caps. Where they do, it is sometimes the result of political pressure rather than because it is prudentially a sound thing to do or because there is a need for it. In fact, Alan Greenspan, advising against raising the deposit insurance cap in the US recently, said, "This is the solution, but what is the problem?" But, nevertheless, the problem was that this was election year and the Bill was passed. We are setting it at $20,000 which we think is the correct level. If you look at Japan, of course, they have no cap whatsoever, but there banks are in quite an extraordinary situation.