MAS Announces Programme to Liberalise Commercial Banking and Upgrade Local Banks
Singapore, 17 May 1999...The MAS today announced a programme to liberalise commercial banking and to strengthen corporate governance of local banks. This is aimed at promoting a more open and competitive environment to spur the development and upgrading of local banks.
In a statement released at a press conference, Deputy Prime Minister and MAS' Chairman Lee Hsien Loong said that the programme would strengthen Singapore's banking system, provide Singaporeans with quality banking services, and enhance Singapore's position as an international financial centre.
The programme comprises 3 key elements:
Implementing a five-year liberalisation programme;
Improving corporate governance practices; and
Lifting the 40 percent foreign shareholding limit.
This programme seeks a controlled shift towards greater competition and more free play for market forces. "We want to shape and strengthen our banking sector, while maintaining confidence and stability in the financial system," said DPM Lee.
MAS outlined three key considerations behind the programme:
First, globalisation and further rapid developments in electronic delivery channels will allow foreign banks to reach out extensively to domestic consumers. This would neutralise the advantages that local banks enjoy from having an extensive branch network and Government protection. The present situation is not sustainable. Even if the Government does not liberalise the banking industry, local banks will be unable to maintain the status quo.
Second, competition, not protection, was the best way to foster the development of strong and large local players, capable of holding their own against the major international banks domestically and in Asian markets. DPM Lee said that "we must pro-actively manage the increase in competition, rather than try to keep out change, and lose both time and the initiative."
Third, MAS must ensure that liberalisation results in local banks strengthening themselves and growing, as they play a pivotal role in providing resilience and stability to the banking system, and underpinning the financial sector. Local banks must therefore strengthen management teams, institutionalise management processes, and improve systems of corporate governance.
MAS also stressed the need to retain a significant local bank presence in Singapore. It said this is necessary to keep a major share of deposits and the payments system in the hands of players with long-term interests with the Singapore economy. This would also allow local banks to act as stabilisers and help Singapore ride through major crises.
The Government's policy is therefore to maintain the local bank share at not less than 50 per cent of total resident deposits in the more open environment. The best way to achieve this is for local banks to upgrade themselves and hold their own against stronger competition. MAS would also monitor the trends as the liberalisation proceeds and adjust the scope and pace of subsequent liberalisation measures if necessary.
MAS also stated that liberalisation made it more urgent for the local banks to consolidate. Singa-pore was unlikely to sustain more than two local banks with the critical size for continuing expansion and growth, although there may be other smaller players occupying niche markets. MAS would not dictate the precise configuration of the industry after consolidation, but an outcome with two strong local banks would provide the financial system with two pillars of strength and stability.
Key features of the programme
Five-year liberalisation package
MAS will implement a five-year programme to liberalise access by foreign banks to Singapore's domestic market. MAS will issue a new category of full banking license known as Qualifying Full Bank (QFB) licenses to foreign banks, increase the number of restricted banks, and give offshore banks greater flexibility in S$ wholesale business.
MAS will commit to a definite package for the first 3 years (1999 - 2001), after which it would review the progress made and reassess the banking industry before deciding on further liberalisation measures.
MAS will grant increased access only to foreign banks that are strong and well-managed, and committed to growing in Singapore. Outlining the criteria for evaluating applications for QFBs, restricted and offshore banks, DPM Lee said that "this is necessary to maintain high prudential standards, minimise risk to local depositors, and develop a competitive financial centre."
MAS will require all local banks to appoint a five-member Nominating Committee within their boards. Its purpose is to ensure that only the most competent individuals, who can contribute to the bank and discharge their responsibilities in the interests of all shareholders, are appointed to the board and key management positions.
MAS explained that to survive in the new competitive environment, "[local banks]
must strengthen corporate governance and attract leadership talent. Only then can they build up stronger corporate teams, and give them the necessary autonomy to make professional management decisions."
Foreign shareholding limit of local banks
The Government will lift the 40 per cent limit on foreign investors' total shareholding in local banks. This was decided based on the following factors:
The requirement to create Nominating Committees, and to have a majority of citizens and permanent residents on the board, would effectively ensure that control of the banks rested with individuals or groups who would act in a manner consistent with the national interest. MAS will also tighten existing safeguards on the accumulation of significant ownership in a local bank.
The foreign shareholding limit had resulted in a two-tier market for local bank shares, which reduced the liquidity in local share tranches and distorted the true market value of local bank shares. The limit had also made it harder for local banks to implement competitive employee share option schemes, and to forge strategic partnerships with foreign banks, or pay for overseas acquisitions with shares.
MAS concluded by saying that the Government has calibrated the pace and extent of liberalisation to inject competition and a sense of urgency, yet allow local banks time to strengthen and reposition themselves. "Our objective is a more competitive industry, with stronger local banks maintaining more than 50 per cent of the market."
Five-year liberalisation package
Eligibility criteria for increased access
Existing safeguards on significant ownership in a local bank.