Reply to PQs on the Effects of Global Financial Turmoil on Singapore
Question No 4 in Order Paper No 58 of 2008
Question No 5 in Order Paper No 58 of 2008
Question No 6 in Order Paper No 58 of 2008
Question No 7 in Order Paper No 58 of 2008
Question No 8 in Order Paper No 58 of 2008
Question No 9 in Order Paper No 58 of 2008
Question No 10 in Order Paper No 58 of 2008
For Oral Answer
Date: For Parliament Sitting on 20 October 2008
Name and Constituency of Member of Parliament
Q 4 Mdm Cynthia Phua, MP for Aljunied GRC
Q 5 Dr Lily Neo, MP for Jalan Besar GRC
Q 6 Mr Inderjit Singh, MP for Ang Mo Kio GRC
Q 7 Mr Inderjit Singh, MP for Ang Mo Kio GRC
Q 8 Mr Low Thia Khiang, MP for Hougang
Q 9 Ms Sylvia Lim, NCMP
Q 10 Mr Gautam Banerjee, NMP
Mdm Cynthia Phua: To ask the Senior Minister (a) what is the impact of the recent financial upheaval on Singapore’s banking and insurance companies; (b) what steps are being taken by the Monetary Authority of Singapore (MAS) to review the exposure of our financial institutions to high-risk instruments; (c) how does MAS monitor the investment risks of insurance companies in Singapore; (d) what is the process for local banks and finance houses to report on their exposure to high-risk financial instruments overseas; and (e) what safeguards are in place to protect our depositors from any catastrophe impacting the financial institutions in Singapore.
Dr Lily Neo: To ask the Minister for Finance (a) to what extent are Singaporeans affected by the collapse of American financial institutions such as Lehman Brothers; (b) how many Singaporeans are losing their savings as a result of this crisis; and (c) what are the safeguards, if any, to protect Singaporeans' savings in financial institutions and insurance companies from similar financial turmoil.
Mr Inderjit Singh: To ask the Senior Minister in view of the meltdown of the financial sector in United States (a) if he will provide an update on the state of our financial institutions especially banks operating from Singapore and their ability to meet the obligations of customers; (b) whether any of the financial institutions operating in Singapore have been weakened by the meltdown; and (c) what additional measures have Monetary Authority of Singapore put in place as lessons learnt to ensure that financial institutions remain viable to protect consumers.
Mr Inderjit Singh: To ask the Senior Minister (a) if he will explain the impact of the AIG bailout on insurance companies in Singapore; (b) what protection do Singaporeans have in the event that any of the insurance companies operating in Singapore become affected by the financial crisis; and (c) what measures are in place to cushion subsidiaries of foreign insurance companies operating in Singapore from such crisis.
Mr Low Thia Khiang: To ask the Senior Minister (a) what is the basis for the Monetary Authority of Singapore's assurance to AIA Singapore policy holders that there are sufficient funds to meet future obligations; and (b) whether MAS is aware if AIA Singapore has invested in products related to Lehman Brothers and United States sub-primes derivatives.
Ms Sylvia Lim: To ask the Senior Minister whether there is any evidence or indication that the American banks and financial institutions currently in distress have taken steps to sell off their Singapore properties on an urgent basis and, if so, what implications will this have on the local property market.
Mr Gautam Banerjee: To ask the Senior Minister whether all insurance companies operating in Singapore can (i) put in place measures and/or programmes to educate policy holders and the public at large on the nature of risks involved in different insurance policies such as investment-linked products, par and non-par funds; and (ii) be more transparent in sharing and explaining information on investment, capital adequacy and solvency requirements.
Mr Lim Hng Kiang, Minister for Trade and Industry and Deputy Chairman:
Mdm Cynthia Phua, Dr Lily Neo and Mr Inderjit Singh asked about the effects of the recent financial turmoil on banks and insurance companies in Singapore and the impact on Singaporeans. Let me explain the impact of the developments on financial institutions in Singapore, the actions that MAS has taken, and why Singapore is well placed to weather the uncertainties ahead.
2. The US is reeling from the bursting of a credit bubble. Much of the credit found its way into home loans. Some of these loans were made to borrowers without properly checking if they could afford to repay. These loans were securitized; the papers were widely distributed and heavily leveraged. When the housing market turned and house prices fell sharply, many borrowers could not repay their home loans. This has resulted in losses for U.S. and European financial institutions holding mortgage loans and securities backed by those loans. This triggered a process of deleveraging in the housing and credit market that started in the middle of last year, and is continuing.
3. The situation in Singapore is different. We do not have the problems that the US banks are facing. Our banks have been responsible in their lending practices. Banks and insurance companies in Singapore do not have large exposures to either US mortgage-related securities or to the institutions that have failed. Nor do we have subprime mortgages that are originated here. The three local banks are very well-capitalised and their asset quality remains strong. Singapore’s financial system is sound and stable, and has not been significantly affected so far. Let me elaborate.
Solvency and Liquidity of Financial Institutions
4. MAS requires the assets of our banks and insurance companies to exceed their liabilities by an appropriate margin, which is set in accordance with MAS’ standards. This provides the bank or insurance company with a buffer to absorb unexpected losses. The riskier the financial institution’s assets, the higher will be the safety margin. The quality of our banks’ and insurers’ assets remains good, and their capital buffers remain strong. Taken together, this means that a bank or insurance company in Singapore will have more than enough assets to pay what it owes to its depositors and policy holders.
5. In the case of foreign banks, MAS maintains high admission standards to determine which institution is permitted to operate in Singapore. Foreign banks, however, maintain significant operations in their home country and internationally, and MAS alone does not determine the solvency of the institution. MAS keeps in close contact with the foreign bank’s home regulator to assure ourselves that the bank continues to meet high standards of solvency and maintain sufficient assets to meet all its liabilities in Singapore and elsewhere.
6. Solvency alone is insufficient, and banks and insurance companies also have to address their liquidity risks. MAS requires both banks and insurers to anticipate their cashflow requirements arising from business needs and the claims of depositors and policyholders and to hold sufficient liquid assets to meet these claims. In addition, MAS requires banks to maintain a significant buffer of liquid assets to meet unanticipated claims from depositors. Insurers’ asset portfolio typically comprises more liquid assets such as bonds and government securities which are more easily liquidated to raise cash should the need arise.
7. MAS generally adopts a conservative approach to the supervision of financial institutions and this has served us well. MAS monitors the financial positions of regulated financial institutions through regular reports of assets and liabilities submitted by these institutions. MAS limits the amount that banks here can lend to any single borrower. This ensures that they are not overly exposed if any single borrower defaults. In addition, the Banking Act limits a bank’s credit and loan exposure to property development and investment activity to 35% of its total non-bank loan and credit exposures. Most banks are significantly below this limit and the aggregate banking system’s exposure here is just 15%. In the last 2 years, MAS has also required all banks with significant operations here to enhance their risk management system, as part of the transition to Basel II, a more risk sensitive international standard for capital.
Overall Market Liquidity
8. MAS has been closely monitoring developments in global financial markets and the impact on Singapore. The inter-bank markets in the US and Europe have not been functioning properly as banks, concerned about the solvency and liquidity conditions of other banks, have not been willing to lend to each other. In Singapore, our domestic interbank markets have been relatively calm and have functioned in an orderly way. Sufficient liquidity was maintained in the banking system. In anticipation of tighter lending conditions, MAS had in July expanded its Standing Facility to all MAS Electronic Payment System (MEPS+) participant banks. This provides assurance that banks can readily access central bank liquidity when required. MAS has also reiterated that it stands ready to inject additional liquidity if needed.
9. Ms Sylvia Lim also asked if there is any evidence of distressed American banks and financial institutions having to sell off their Singapore properties on an urgent basis and the implications on the local property market. The funding pressures that have arisen in the US and Europe do not arise in Singapore domestic market. The Singapore property holdings of US and European banks are small in relation to our market. Moreover, all banks here have a wide range of assets including corporate and consumer loans, substantial holdings of Singapore Government Securities, and other securities and assets which are not related to property.
10. To summarise, the crisis in the U.S. and Europe is serious. We have seen some of the largest financial institutions in those countries come under severe solvency and liquidity pressures. AIG, which had huge exposures in the credit derivatives market, experienced losses and had its credit rating downgraded. This triggered liquidity pressures forcing US authorities to provide a loan to prevent AIG from defaulting on its obligations and pushed into bankruptcy. Banks in the US and Europe have been unwilling to lend to each other. This has prompted the European and the US governments to take extraordinary measures in recent weeks to recapitalize their major banks and guarantee bank borrowings. This has improved confidence in their markets and banking systems. While the situation has improved with the announcement of these major initiatives, we are not out of the woods and substantial challenges remain in the international financial system and the global economy.
11. Given the openness of our economy and our role as an international financial centre, we cannot hope to be decoupled from what is happening in the global financial markets. We must, therefore, stay highly vigilant on the channels through which global developments can affect us. MAS has, for some time now, stepped up its surveillance of international developments and is also in close contact with regulators and central banks in other jurisdictions.
Impact on Insurance Policy Holders and Bank Depositors
12. Singaporeans are anxious about the impact of the US financial turmoil on their savings and insurance policies. I thank MPs for raising these concerns. Let me now address the specific questions posed. Mr Low Thia Kiang asked about AIA Singapore’s exposure to Lehman Brothers and the US subprime market. MAS has checked and the exposure is limited. Mr Singh asked about the impact of the AIG bailout on insurance companies in Singapore. The bailout of AIG does not directly impact other insurance companies in Singapore besides the AIG related insurance entities here. The bailout has given AIG time to address its deteriorating financial position and with its recent announcement to sell some of its businesses to restore AIG's financial strength, AIG policyholders can be more assured that AIG will be able to meet its obligations to its policyholders. AIG has also announced that it would continue to operate most of its life insurance business in Asia, including Singapore. This has given some assurance to policy holders of the continuity of their policies with the same insurance provider.
13. Mr Banerjee asked if insurance companies can put in place measures to educate policy holders and the public at large on the nature of risks involved in different insurance policies, as well as the financial strength and performance of the insurers. The Life Insurance Association and General Insurance Association have been working with MoneySENSE, the national financial education programme, to conduct free public talks and publish consumer guides on different types of insurance policies, such as participating policies, investment-linked policies, health policies, and motor policies. These guides are available on the MoneySENSE and the two associations’ websites.
14. There are also various avenues to obtain financial information on an insurance company. MAS publishes on its website the annual statutory returns of insurers containing information on the type of investments and solvency positions of individual insurers. In addition, some insurers publish financial information on their corporate websites and/or in their annual reports. MAS also requires insurers to provide their participating life insurance policyholders information on the investment strategy and broad investment mix of the participating fund as well as the performance of the fund on a regular basis.
15. Dr Neo, Mr Singh asked what safeguards are in place to protect policy owners and depositors if an insurance company or bank should fail. Let me reiterate that the most important safeguards are what I have just outlined: high admission standards, standards of solvency and liquidity and rigorous supervision, as well as a functioning and orderly interbank market. Our focus has been, and must continue to be, on preventing problems in the first place. However, in the worst case scenario that a bank or insurance company fails, policy owners and depositors have higher priority under the law than other unsecured creditors to claim against the assets of the insurer or the bank.
16. The additional line of protection is in the form of the policy owners’ protection fund (PPF) and deposit insurance schemes. The PPF protects 90% of what the insurer is liable to pay to the owners of life policies. The protection is 100% for compulsory insurance policies for motor bodily injury and work injury.
17. As Members would be aware, the Government announced a guarantee on all deposits last Thursday. I will say more later in my Ministerial Statement.
18. I want to assure Members that the confidence that depositors and policyholders have in the stability and soundness of Singapore’s financial system, and in the protection and priority they are accorded under the law is well-placed.