DPM Lee's Reply to Parliamentary Question on Plans to Speed Up and Further Liberalise the Banking Sector to Foreign Competition
Issues Raised in Parliament
ANSWER TO PARLIAMENTARY QUESTION ON:
Plans to Speed Up and Further Liberalise the Banking Sector to Foreign Competition
For Parliament Sitting on 11 Feb 1999
To ask the Deputy Prime Minister whether there are other plans to speed up and further liberalise the banking sector to foreign competition following the recommendation of the Monetary Authority of Singapore International Advisory Panel (IAP).
1 The MAS is liberalising the domestic banking sector, to allow greater access to foreign institutions and a freer play of competitive forces. This will achieve three objectives:
- a. It will encourage banks to provide efficient and innovative services, comparable to the best available in other major financial centres;
- It will nurture a group of robust local banks who measure up against leading international players operating in Singapore and abroad; and
It will encourage strong and well-managed foreign institutions to expand their activities in Singapore, and take a stake in the growth and stability of our financial system.
2 I announced in July last year that MAS would progressively open up the domestic banking sector over five years. When MAS briefed its International Advisory Panel (IAP) on its plans, the IAP agreed with MAS' policy of liberalisation. The IAP also agreed on the importance of having strong local players after we liberalise. However, the IAP felt that five years was not ambitious enough, and recommended the MAS consider speeding up the process.
3 The MAS is now working out the specific liberalisation measures and will take the IAP's views into account. It will probably keep the five-year time frame, but take bolder steps in the earlier years. We will announce the programme of liberalisation soon.
4 The MAS is reviewing all restrictions in the domestic retail sector, including limits on opening additional branches, setting-up off-premise ATMs, participating in shared-ATM networks and offering Electronic Funds Transfer at Point-of-Sale (EFTPOS) services. MAS is also reviewing rules governing foreign banks granted offshore licences, to see how reputable offshore banks can have greater access to the domestic market.
5 Overall, foreign banks already have wide access to Singapore's banking sector. They compete freely with local banks in wholesale domestic banking, offshore banking, and treasury and capital market activities, but face restrictions in the domestic retail market. Foreign banks account for more than a third of total resident deposits, and 45% of loans to resident borrowers (nearly half). They also account for the vast bulk of the business with non-residents (86% of deposits from non-residents and 95% of loans to non-residents). Foreign banks enjoy a larger market share in Singapore than elsewhere in Asia, or in any major financial centre.
6 Nevertheless, MAS intends to liberalise the banking system further, as this is the best way to upgrade the industry, develop robust local banks, and enhance our role as a international financial centre. We will not open up indiscriminately, and risk the high prudential standards that our reputation depends upon. Instead MAS will provide greater access to foreign banks with strong global track records, sound credit ratings, and a demonstrated commitment to Singapore's financial system.
7 Market analysts and rating agencies consider Singa-pore banks the soundest and best in Asia. Our banks operate efficiently, and offer high quality retail banking services. However, the banking environment is being transformed, in the region and globally. Existing franchises and market shares are being challenged. Players who do not adjust quickly and develop new capabilities quickly risk losing their positions altogether.
8 Competition, not protection, is the only way to develop strong local banks which measure up against the best international players. Our banks must make this leap to make the grade. Unless they gear up now to hold their own against greater competition in an open domestic market, they will not be ready to compete for opportunities in Asia as the region recovers over the next few years.
9 We hope that more than one Singa-pore bank will develop a significant presence in Asian and international markets. To do this, Singa-pore banks must provide innovative and efficient personal financial services comparable to the best retail banks, and strengthen their capabilities in corporate banking and non-traditional, fee-based businesses. No bank can be strong in all areas of banking. Some local banks will choose to specialise. But to compete, they all have to use capital more efficiently, and cut costs by farming out back-room operations that can be more efficiently performed outside, just like the leading international banks. Most important, they need to attract the best banking talent available both locally and abroad, put in place systems to reward and motivate top performance, and build outstanding management teams.
10 I am happy that several local banks have already announced and started implementing plans to prepare for the new era. They are alive to the changing business environment. I am confident that the liberalisation will result in a more competitive banking industry, stronger local institutions, and better service to customers.