Parliamentary Replies
Published Date: 15 April 1999

DPM Lee's Reply to Parliamentary Question on Pace and Path of Banking Mergers in S'pore

Issues Raised in Parliament

Pace and Path of Banking Mergers in S'pore

For Parliament Sitting on 15 Apr 1999

To ask the Deputy Prime Minister whether the Government's position in determining the pace and path of banking mergers in Singapore is contradictory to the principle of adhering to free market forces in Singapore's open economy


1 The Government must set the pace of liberalisation in the banking sector, because we do not start from a totally laissez faire situation. While we have promoted competition in the banking industry, MAS has restricted foreign banks' activities in the domestic retail markets to protect and build up local banks.

2 Foreign banks are subject to limits on opening branches, setting up off-premise ATMs, participating in shared-ATM networks and offering Electronic Funds Transfer at Point-of-Sale (EFTPOS) services. Nevertheless they enjoy a larger market share in Singapore than elsewhere in Asia, or in any major financial centre. They compete freely with local banks in many banking activities ranging from wholesale domestic banking, to treasury and capital market activities.

3 The banking system is a key component of our economy. Strong domestic banks anchored in Singapore have interests closely aligned to the interests of Singapore. They are more likely to take a long term view of the business, especially in a crisis. A financial system in which the local banks have a large market share is therefore likely to be more stable and resilient.

4 However, globalisation and rapid technological change are transforming the banking environment globally. Inevitably, this means more foreign competition for local banks, for example through internet banking or non-bank institutions offering financial services. MAS could retard the process by tightening regulatory restrictions on foreign banks. But that would mean shielding the local banks from pressures to upgrade, depriving Singaporeans of quality banking services, and making the ultimate adjustment more traumatic, when change can no longer be postponed and the barriers finally come down.

5 Competition, not protection, is the best way to upgrade the industry, and develop strong and robust local banks which measure up against the best international players. Competition will encourage local banks to rationalise their operations, further exploit economies of scale and deliver efficient and innovative services comparable to the best available in other major financial centres.

6 By taking steps to liberalise the banking industry now, we can pro-actively manage this change. But we cannot simply remove all restrictions overnight because the industry needs time to adjust to the new environment, and we must maintain confidence and stability in the banking system.

7 The transition from the present state to the new one must paced so as not to jeopardise this confidence and stability. MAS is, therefore, drawing up a 5 year programme to do this.

8 The Government needs to shape the final outcome of the liberalisation, and not leave things purely to chance. Our aim is to have an open banking sector with strong local banks, not an industry from which local banks have been marginalised. We will liberalise in such a way as to allow and encourage the local banks to upgrade themselves into strong players. We are confident they will use the next five years to do so.

9 MAS has been discussing its plans with the local banks, both to seek their feedback, and to impress on them the urgency of change. At the same time, MAS has also been meeting with foreign banks to discuss how we can encourage strong and well-managed foreign institutions to make further commitments in Singapore and take a stake in the growth and stability of our financial system.

10 The local banks are well run for their size, and are highly rated compared with other Asian banks. But they lack the economies of scale to hold their own against foreign banks that operate globally. If the local banks can consolidate and rationalise, and continue to build up and attract outstanding management teams, they can upgrade their operations and services, earn better returns for shareholders, and become stronger players both in Singapore and the region. That is what MAS is encouraging the local banks to do. However, MAS is not in a position to compel the banks to merge, let alone dictate who is to merge with whom. That can only be decided by the shareholders of the banks.