Speech by DPM Lee Hsien Loong for the Second Reading of the Banking (Amendment) Bill 1998
Speech by DPM Lee Hsien Loong for the Second Reading of
the Banking (Amendment) Bill 1998
On 29 Jun 1998
Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."
2. International financial markets have over the years become more interdependent, as a result of technological advancements, competition and the increased scale and sophistication of financial players. Disturbances in one market are transmitted rapidly to other markets, as the spread of the Asian financial crisis in the last year illustrated. Large banks and financial institutions are managing their exposures and risks on a global basis, wherever they operate.
3. This trend toward increased globalisation in financial activity underscores the need for closer co-operation among supervisory authorities in protecting the integrity and soundness of their financial markets, as well as of the international financial system. This is all the more important for Singapore, which as an international financial centre, has a large number of foreign banks. The MAS must therefore be able to engage in co-ordinated, global supervision with its counter-parts in other countries, to strengthen the supervision of large international banks and safeguard the stability of the financial system.
Inspection by Foreign Supervisory Authorities
4. The Banking Act was amended in 1996 to include a new section 45A to allow foreign supervisory authorities to inspect their banks' operations in Singapore, which was until then not permitted. This was to enable home supervisory authorities to exercise effective consolidated supervision over their banks' global operations. To safeguard the confidentiality of customer information, a foreign supervisory authority is allowed to inspect its banks' operations if it provides MAS with an undertaking not to divulge the information to other parties.
5. Several supervisory authorities have been unable to undertake to MAS that they will not divulge the information obtained to a third party under any circumstances, as they could be compelled under their domestic laws to disclose information held by them to their courts or legislature. Hence, under the current Act, they cannot inspect their banks here.
6. The major international financial centres, such as the US, the UK, Hong Kong and Australia allow home supervisory authorities to inspect foreign banks operating in their jurisdictions. These countries impose conditions which are less stringent than Singapore.
7. The Banking (Amendment) Bill proposes to amend section 45A to enable foreign supervisory authorities, or bodies appointed by them, to inspect the Singapore branches of their banks if they provide a written undertaking to maintain the confidentiality of the information obtained, as determined by MAS. This will allow inspections by foreign supervisory authorities which are conducted solely for super-visory purposes. The written undertaking is to ensure that foreign supervisory authorities do not disclose information obtained from inspecting their banks here, unless compelled by their laws. The Bill will also amend the conditions under which foreign banks in Singapore may disclose to their parent supervisory authorities information on credit facilities granted. Currently they may do so only if the supervisory authority does not divulge the information to any third party.
8. Foreign supervisory authorities will however still be prohibited from accessing information on deposits and private banking accounts during the on-site examinations. Also, foreign banks will still be disallowed from disclosing information on deposits and private banking accounts to their parent supervisory authorities.
Disclosure of information on borrowers9. Presently, the Banking Act allows MAS to provide information on the operations of a foreign bank to the parent supervisory authority, but not the particulars of a customer's account. The Bill proposes to allow MAS to provide information on particulars of credit facilities granted by the Singapore branch, to parent supervisory authorities, solely for supervisory purposes. Such information on credit exposure is necessary for foreign supervisory authorities to assess the asset quality of their banks on a global basis. However, no information on deposit and private banking accounts of foreign banks in Singapore will be provided to parent supervisory authorities, even with the amendment.
Real-Time Gross Settlement System10. The second main amendment proposed in the Bill is to provide for the introduction of the Real-Time Gross Settlement (RTGS) system. Every day, large amounts of money are transferred through interbank payment systems around the world. It is estimated that in the G-10 countries alone the daily turnover of the main payment systems is more than US$5 trillion. Many of these payments are to settle financial market transactions between the banks themselves, such as interbank loans or foreign exchange deals.
11. In recent years, there has been increased recognition that the way many of the payment systems worked exposed the participating banks to large risks, with potential repercussions for the financial system as a whole. If one bank were to fail to meet its obligations for whatever reason, other banks in the system could face liquidity problems or even fail as a consequence of these interbank exposures. Because of these concerns, countries have been taking action to make their payment systems more robust. The Bank for International Settlements (BIS), an international institution which seeks to promote central bank cooperation and foster international financial stability, has strongly encouraged all countries to introduce RTGS systems.
12. The Bill proposes to allow MAS to establish and operate an RTGS system in Singapore. The RTGS system will be implemented on 13 July. It will replace the existing interbank payment system called SHIFT which was established in 1985. SHIFT is an electronic payment system that settles interbank payments on a net basis at end of the day. This means that all payment instructions are accumulated throughout the day and at the end of day, the net obligation for each bank is computed and settled. This gives rise to a risk to the whole banking system. Should one bank not have sufficient funds to meet its obligations at the end of the day, all the payments that have been accumulated during the day may have to be unwound, and other banks may be affected.
13. Under the RTGS system, payment instructions between banks are processed and settled individually and continually during the day, subject to the paying bank having sufficient funds in its current account maintained with MAS. Once settled, the Bill provides that the payment is final and irrevocable. The receiving bank is thus assured of good value for the funds and can use the funds immediately without being exposed to risk. The RTGS system therefore reduces the chances of settlement failure in one bank affecting other banks, thereby also reducing systemic risk. The Bill also contains provisions to ensure that the stability of the system is not unduly affected by the insolvency of any single bank.
14. The RTGS system will thus enhance the stability of Singapore's financial system. RTGS systems have been or are being implemented in many developed financial markets, including the US, the UK, Switzerland, Germany, Japan, Hong Kong and Australia.
15. It is common for central banks to own and operate interbank payment systems as they have responsibility for ensuring the efficient operation of payment systems, which is critical for the smooth functioning of the financial system. Some central banks that operate their respective countries' payment systems are the US Federal Reserve, Bank of Japan, German Bundesbank, Banque de France and Bank of Italy. Others such as Hong Kong and the United Kingdom have set up separate companies to operate their RTGS systems, but under central bank control.
16. Under the Bill, MAS will be protected from liability arising from operating the RTGS system, except where it involves a reckless act or omission, or intentional misconduct on the part of MAS. This is similar to the RTGS systems in Hong Kong and the United Kingdom. The RTGS system will apply to the transfer and settlement of book-entry securities and other instruments in addition to payment obligations.