MAS Urges Banks to Meet the Challenges of Technological Change and Financial Disintermediation
31 December 1999 to be a bank holiday;
SIMEX to launch a S$ interest rate futures contract
Singapore, 21 Jun 99 ... Speaking at the 26th Annual Dinner of the Association of Banks in Singapore (ABS), MAS' Managing Director Mr Koh Yong Guan said that banks in Singapore should move forward resolutely to meet the challenges of technological change, financial disintermediation, and skills development as they enter the new millennium. He also announced that MAS has agreed to ABS' proposal to declare 31 Dec 1999 a bank holiday, and that SIMEX will launch a Singapore Dollar interest rate futures contract soon.
Ready for Year 2000
On preparations for Year 2000, Mr Koh said that MAS had conducted more than 350 inspections on individual financial institutions to-date and was satisfied that Singapore's financial sector would be well-prepared for the transition to the new millennium. All financial institutions were expected to complete their internal testing of mission critical systems and external tests as well as develop and validate business continuity and contingency plans by the end of this month. Mr Koh noted that Singapore and Hong Kong were the first two countries in the world to receive an ALL GREEN rating from the Global 2000 Co-ordinating Group.
As part of the Year 2000 efforts, Mr Koh announced that MAS has agreed to ABS' proposal to declare 31 Dec 99 a bank holiday. A bank holiday is not a public holiday. It entails:
Closure of bank branches on 31 Dec 1999. Bank customers, however, can still use existing 24-hour banking services such as ATMs, phone banking and Internet banking.
A non-settlement day for 31 Dec 1999. This means that financial transactions scheduled for settlement on 31 Dec 1999 will either be brought forward to 30 Dec 1999 or postponed to 3 Jan 2000.
The declaration of 31 Dec 1999 as a bank holiday will help boost public confidence by allowing banks to begin their year-end processing and back-ups early, thereby ensuring that there would be complete and correct records of customers' accounts and year-end positions at the start of the new millennium. However, Mr Koh said that there was no reason to declare 3 Jan 2000 a bank holiday, as MAS was confident that Singapore's financial system would remain sound and resilient from the outset of the new millennium.
Seizing Opportunities in Internet Banking
Mr Koh urged local banks to seize the opportunities presented by the Internet and expand their Internet banking capabilities. He explained that the dramatic growth of advanced communications and Internet technology in recent years had caused a fundamental change in the way banks compete by reducing the cost of service delivery, breaching geographical boundaries and altering the bank-customer relationship.
Noting that banks in Singapore had already started to offer Internet banking, Mr Koh outlined three areas for further improvement. First, banks should consider strengthening their ability to cross-sell products on the Internet, e.g. distributing non-banking products such as insurance and unit trusts over the Internet. Second, they should invest more in technology so as to increase their branding and service quality, and ensure that their Internet service offerings remain attractive in a more competitive banking environment. Third, banks should consider pooling their resources in research and development of new technology and sharing consolidated backroom processing facilities to defray their investment costs. This would be one way they can compete effectively with international players who have a much larger customer base world-wide to spread out their investment cost.
Facing the Challenge of Financial Disintermediation
Mr Koh said that financial disintermediation, arising from the emergence of capital markets and proliferation of retail investment products, was the next big challenge for banks in Singapore in the new millennium. Easier access to capital markets and new capital funding instruments had enabled corporate borrowers to raise funds more cheaply from the capital market compared to bank borrowings. Banks were also having to innovate and expand their product range to maintain their funding base, as savers become more sophisticated and have more avenues and instruments to invest their cash.
Mr Koh pointed out that although disintermediation was not yet a significant threat to banks in Asia, Singapore's efforts to develop the capital markets and fund management industry would bring disintermediation to the doorsteps of banks in Singapore.
Mr Koh urged local banks to learn from the experience of leading international banks in managing the disintermediation process and meeting the challenges posed by the emergence of the capital markets. He outlined three strategic responses that leading international banks had been making. First, many of the leading banks were combining with non-bank financial services companies to tap a larger pool of customers and compete with non-bank entrants in financial services. Second, the leading banks were re-engineering their processes and focusing on non-traditional banking activities to cushion the erosion of their traditional earnings. Third, they had gone into new areas like credit derivatives which effectively allowed banks to separate the roles of originating and holding credit risk. Mr Koh encouraged banks in Singapore to leverage on the well-established legal framework here to develop the credit derivatives market. On its part, MAS will be issuing guidelines on credit derivatives by the end of the year.
Enhancing Skills Levels
Mr Koh said that the third key challenge lay in improving the quality of bank management and professional staff as increasingly sophisticated activities emerged in the financial markets and as other financial centres built up their capabilities. The ability to leverage on cutting-edge technology, develop new products and offer all-round quality service will be key in differentiating Singapore banks in the region, and all banks in Singapore have to enhance their skills set further to expand in the higher-value added areas such as loan syndication, project financing, credit derivatives and risk management. Mr Koh said that MAS would work actively with the industry and institutions of higher learning to identify and bridge gaps in the financial sector's manpower requirements, and support the industry's skills upgrading efforts through the Financial Sector Development Fund.
Launching a Singapore Dollar Interest Rate Futures Contract
Mr Koh also announced that SIMEX has recently decided to launch a Singapore Dollar interest rate futures contract. This will give investors and financial intermediaries another instrument to manage their interest rate risks and help promote greater liquidity in the Singapore dollar bond and derivatives markets. Mr Koh said that Singapore's sound macroeconomic fundamentals and MAS' proven track record for managing the Singapore Dollar exchange rate will help minimise the risk that this futures contract might help facilitate speculation against the Singapore Dollar. SIMEX is working out the specifications of its new contract and will be making an announcement in due course.
Building on Singapore's Strengths
In conclusion, Mr Koh said that the recent draft proposal by the Basel Committee on Banking Supervision for a new Capital Adequacy Framework augured well for Singapore. Since the new Framework provided a more comprehensive and sensitive approach to addressing risks in banks, banks in Singapore, which were strong and well-capitalised, would stand to benefit. They would be able to obtain cheaper funding.