Published Date: 27 November 1998

"Financial Sector Review : A Round-Up & Next Steps Financial Sector Review Group (FSRG) Appreciation Dinner"

Speech by DPM Lee Hsien Loong at the Financial Sector Review Group (FSRG) Appreciation Dinner, Shangri-La Hotel

Date: 27 Nov 1998


1   When the Financial Sector Review Group (FSRG) first started work a little over a year ago, we decided that the fastest way to get started was to tap the expertise and knowledge in the private sector. A Finance and Banking Competitiveness Sub-Committee, chaired by Mr Peter Seah, under Mr Lee Yock Suan's Committee on Singapore's Competitiveness, was already at work. Naturally, we promptly co-opted them, with the CSC's agreement.

The Five Committees

2   Mr Peter Seah's committee did an excellent job covering a wide scope in a short period of time. They made many bold and valuable recommendations, most of which have been accepted and implemented. MAS' prompt and positive response to their report showed that we were serious in rethinking our approach to the financial sector, and were prepared to make fundamental changes both in substance and in the way the Government worked with the private sector.

3   A few specific areas raised needed to be studied in greater detail. The FSRG therefore set up three more private sector committees to address them: the Committee on Banking Disclosure chaired by Mrs Elizabeth Sam; the Corporate Finance Committee chaired by Mr Lim Yong Wah, and the Stock Exchange of Singapore Review Committee chaired by Mr Lim Hua Min.

4   Mrs Elizabeth Sam's Committee proposed ways to raise disclosure and accounting standards of banks to international best practice. Our banks have long been among the soundest in the region, and had everything to gain from greater disclosure and transparency. Nevertheless, changing the long-entrenched practice of maintaining hidden reserves, and providing minimum information in the published accounts, essential though it was, took considerable boldness and conviction. This fortunately the Committee on Banking Disclosure possessed.

5   The Corporate Finance Committee reviewed the philosophy underlying the operation and supervision of our capital markets. We knew that we needed to shift from merit-based to disclosure-based regulation, in line with international practice. But what exactly this general statement meant had to be fleshed out in specific principles and policies. This was no trivial task. Not only did the Committee have to build a robust framework, but they also had to involve capital market participants in thinking through the problems together, and working out the implications.

6   Without this active collaboration and application, the new approach could easily become so many empty buzzwords. Then at best nothing would really change, but at worst we would sail on blissfully thinking that we had new market disciplines, until one day something would go wrong for lack of proper safeguards.

7   The Stock Exchange Review Committee was tasked to review the traditionally protected business of stockbroking. Winds of change have been sweeping exchanges and the stockbroking industry worldwide. Our stockbrokers had to anticipate this sea-change. They could not continue to work in the old comfortable ways without risking irrelevance. This Committee had to suggest how best to deregulate the industry, free brokerage commissions and open up access to the exchange. In some ways it had the hardest job, for in proposing changes to ensure the vitality of the exchanges and industry in the long term, it had to look beyond the short term interests of the existing SES members.

8   Mr Lim Hua Min's Committee report proposed that the minimum commission rates be progressively reduced, and that the industry be completely opened up within 5 years. It also became clear from their report that this was not just a matter of doing basically the same business except with a greater degree of competition. More fundamental and far reaching issues of the governance of the exchange had to be studied, which were beyond the scope of the SES Review Committee.

9   To follow up these broader issues, we set up the Committee on the Governance of the Exchanges, chaired by Mr Tharman Shanmugaratnam. Although MAS provided the Chairman, we again tapped heavily on expertise in the private sector. The Committee worked intensively over 3 months, to produce recommendations on how Singapore could reap the "first-mover" advantage to become a leading combined cash-derivatives exchange in Asia. The outcome was the decision to demutualise and merge SES and SIMEX, and to fully free up both commissions and access by January 2002.

10   Individually the proposals of the 5 committees are incremental, but together they represent a major reform in our financial sector. The significance of the changes is not just in the new policies that are the fruit of the committees' efforts, but also in the way the private sector has been involved in formulating them.

11   You have helped us to tap industry expertise, and to develop the industry consensus and common purpose in a manner which the FSRG could not have achieved by itself. In turn your committees only succeeded because individual committee members, and particularly the Chairmen, took on their tasks with an enthusiasm and commitment that went well beyond the call of duty. I know the price must have been high, in terms of time not spent with your families or on your regular jobs. I am told for instance that some committees were busy working throughout the Deepavali long weekend, and I am sure many other weekends too.

12   Certainly you kept the MAS staff supporting your committees very busy. It was not a case of the private sector doing work to relieve MAS staff of their duties. Had your reports not contained anything substantial, MAS could simply have filed them away and proceeded forthwith to organise the appreciation dinner. But as it was, MAS officers had their hands full following up: reviewing your proposals, getting decisions taken, and implementing the government's responses.

13   The efforts of all those involved - both private sector and public - show in the results. On behalf of the Government, I thank all of you for your contributions. Of course, in Singapore good performance is rewarded with more extra duties. So if you are again invited to do national service in future, I hope this experience will be reason for you to accept again.

Formalising Private Sector Consultation

14    We must continue to encourage this productive public-private sector collaboration and cross-pollination of ideas. MAS will institutionalise this consultation with the industry, in order to help us to generate ideas, keep abreast of market developments, anticipate global trends, and review our financial sector strategies.

15   MAS will establish a Financial Sector Advisory Council (FSAC) to facilitate regular feedback and ideas from market participants in Singapore. The objectives of the FSAC are to:

  • Provide MAS with feedback on regulatory issues;
  • Help MAS identify emerging market trends and new development opportunities for Singapore;
  • Gather and facilitate exchanges of views with market participants in Singapore and internationally, and promote the adoption of international best business practices here.

16   Mr S Dhanabalan, Chairman of DBS Bank, has agreed to be the first Chairman of the FSAC.

17   MAS is also setting up an International Advisory Panel (IAP) to give us a global perspective from leading financial executives worldwide. The IAP will comprise 10 - 12 distinguished market participants, consultants and regulators. Specifically, the IAP is envisaged to:

  • Advise MAS on trends in the global financial industry, emerging business lines and new growth opportunities;
  • Help MAS keep abreast of market developments and policy initiatives in major international centres;
  • Provide MAS with insights into international best practices in central banking and financial supervision.

18   The first meeting of the IAP will be in January next year. Mr J Y Pillay, an MAS Board member and Chairman of the Pro-tem Committee overseeing the merger of the two exchanges, will be the first chairman.

Progress In Financial Sector Changes

19   While the Committees were making steady progress, the FSRG too has been quietly working. Its work has been greatly facilitated by the full support it has enjoyed from the rest of MAS management and staff, and the civil servants from the Ministry of Finance and other government agencies with whom MAS must cooperate closely in order to do its job.

20   Over this last year, we have reviewed and built upon the existing strategies and regulations; developed fresh ideas to capture emerging opportunities; and started to set up the machinery and organisation to implement these ideas. We commissioned a financial sector strategy study by McKinsey and Company, and a complementary financial sector IT strategy study by Arthur D. Little. Both have been completed. The consultants have been very useful in providing us with an international perspective and strategic advice on emerging industry trends.

21   Notwithstanding the current economic crisis, our medium term view of prospects for our financial sector is cautiously optimistic. Over the next five years, we hope Singapore will become a premier full-service financial centre in Asia and the world.

22   The financial sector already makes up 12% of our GDP. We hope this share will expand as our policies begin to show results. We start with some significant advantages - excellent infrastructure, a pool of skilled manpower, a business-friendly and attractive living environment, a sound regulatory framework, and a strong collective drive to succeed.

23   Most important will be our ability to nurture, train and upgrade sufficient local talent, and to attract and retain top international talent. The Financial Sector Development Fund, from the proceeds of sales of shares in the new combined exchange, will provide some of the resources needed.

24   We have already started to make changes in several areas, instead of waiting for a comprehensive masterplan. This is to save time, and to ensure that the changes are progressive rather than sudden.

Captial Markets

Asset Management

25   In asset management, we have introduced incentives to attract more international asset management firms and enlarge the base of buy-side players. MAS' promotion efforts over the last few months have shown promise, despite the difficult environment. We will also be nurturing the development of boutique asset managers.

26   CPF Investment Scheme rules have been revised to allow and encourage CPF members to have their investible funds managed by professional asset managers. More GIC funds have been placed with external asset managers, and MAS itself will also place out some of the funds it manages.

27   A vibrant asset management industry will make us more attractive to a broader range of intermediaries and issuers, and so catalyse the development of the debt and equity capital markets. It will also benefit the insurance and reinsurance sectors, for which asset-liability matching and asset management are key business components.

Debt Capital Market

28   Debt capital markets are another area with considerable potential. The Asian debt market has been hard-hit by the regional turbulence. But the underlying need for debt financing in the region has not evaporated. When conditions improve, the demand for funds will return and even increase. But as banking systems in the region go through a longer period of consolidation, and as lending standards are tightened up, corporates will need to rely more heavily on raising funds in the debt markets.

29   MAS has been issuing more Singapore Government Securities (SGS) to increase the free-float and deepen the bond market. It recently issued 10-year SGS to extend the long end of the yield curve.

30   Statutory boards and government-linked companies (GLCs) are issuing bonds to fund their long-term infrastructure and operational needs. Jurong Town Corporation (JTC) has just launched its medium-term note programme. Other statutory boards like the Housing Development Board (HDB) and the Land Transport Authority (LTA) will follow shortly.

31   MAS has revised its Singapore dollar internationalisation policy, to allow supra--nationals and high-quality foreign corporations to tap the S$ bond market, while maintaining safeguards to discourage speculation in the S$. The first bond issue, by the International Finance Corporation in October, was well-received, showing that there is strong international interest in issuing S$ bonds.

32   MAS has also been working with other government agencies to develop the legal, regulatory, tax and accounting frameworks to support mortgage and asset-backed securities markets. The development of these markets will broaden the range of debt instruments available, and create spin-offs for other market players, like rating agencies and financial guarantee insurers.

Equity Capital Market

33   In equities, the process of merger and demutualisation of SES and SIMEX has begun. The Pro-tem Committee on the new integrated exchange headed by Mr J Y Pillay will oversee the process.


34   In banking too, progress has been made. The new disclosure standards help depositors and investors to reassure themselves of the soundness of our banks, particularly in the midst of the regional crisis. The merger of DBS and POSBank lays the basis for us to develop a first class Singapore financial institution, with a significant presence in markets abroad.


35   In banking supervision, MAS has progressively moved away from a "one-size-fits-all" approach to more risk-based methods. MAS has been systematically strengthening its supervisory capabilities. It has recruited more staff from the private sector, to bring in fresh perspectives and share in the expanded supervisory responsibilities. MAS examiners have begun using new risk-based methodologies and teams of officials are being sent overseas to study the experience of other well-established regulators. For routine inspections MAS now gives banks advance notice, in order to prepare the information needed. On the whole, inspections are now shorter and more focussed.

36   More regular supervision and monitoring of risk profiles will help MAS reduce high across-the-board regulatory requirements. In July, MAS took the first step by reducing the Minimum Cash Balance for banks from 6% to 3%. This was in recognition of the banks' improved liquidity management systems which reduced the need for bigger cash buffers.

Reviewing the Capital Adequacy Ratio

37   MAS will now take a second step, to refine the Capital Adequacy Ratio (CAR) that local banks are required to maintain. Singapore banks have since 1992 been required to maintain a CAR of 12%. This is much higher than the BIS standard of 8%. Moreover, we have required this 12% to consist entirely of Tier 1 capital, i.e. equity, whereas of the BIS 8%, only 4% needs to be Tier1. The remainder can consist of cheaper Tier 2 capital.

38   A high CAR means a sounder bank, but it also raises the cost of funds to the bank and lowers its return on equity. MAS has been right to insist that our banks be well-capitalised, above BIS standards. Neither is the MAS standard currently of pressing concern to the local banks, all of which maintain capital in excess of the 12% ratio. However, the requirement that the entire 12% of CAR consist of Tier 1 capital will constrain the flexibility of the banks to fund themselves when they grow their local and regional operations, particularly as economic conditions turn around.

39   MAS has reviewed this requirement carefully. It has decided to maintain the requirement of 12% CAR. However, from 1 Dec 98, MAS will permit a change in the composition of this 12%. Of the 12%, banks will be required to have at least 10% in Tier 1 capital. They can meet the remaining 2% with Upper Tier 2 capital.

40   MAS will define Upper Tier 2 capital more stringently than under BIS standards. Upper Tier 2 will include funds raised from hybrid and long-dated subordinated debt instruments which satisfy MAS's conditions 1, and a limited portion of banks' unencumbered general provisions. Unlike the BIS and most other regulators, we will not allow revaluation surpluses from banks' holdings of shares or property to be counted as Upper Tier 2. We will also not allow any Lower Tier 2 capital like conventional subordinated debt, or shorter term Tier 3 debt instruments 2.

41   For Tier 1, MAS will also expand the definition to include restricted forms of "equity-like" capital instruments, up to a cap 3. These have been allowed by regulators in several developed countries for some time, and have recently been endorsed by BIS.

42   The adjustments are in line with international norms, and do not represent any lowering of prudential standards. The new MAS standards will continue to exceed those applicable in any other financial centre, and remain the highest in Asia.

Reviewing the Minimum Liquid Asset (MLA) Requirement

43   The third step in MAS' review of banks' capital and liquidity requirements will be to refine the banks' Minimum Liquid Asset (MLA) requirement. The current MLA of 18% of banks' liabilities base is the highest in the world. This provides a substantial cushion for banks against potential liquidity difficulties, but it is not the most efficient way for banks to manage their liquidity needs.

44   We will consider how to lower this across-the-board MLA requirement, and place more importance on banks' internal systems of liquidity management. Banks with sound liquidity management systems will be given greater leeway to manage their needs, while banks which are assessed by MAS to have weaker systems will be required to maintain a higher level of liquid assets, which may be even higher than the current 18% if necessary.

45   MAS is studying the best practice among overseas regulators. We will consult closely with the banks over the next 6 months to establish an appropriate liquidity supervision framework, before we decide on the new requirements.


46   There will be plenty to do over the next few years, as we continue to pursue changes in our financial sector, implement market-based supervisory policies, and keep abreast of continuing rapid worldwide developments in the industry. But we have reached the point where this should no longer be led by a special committee and undertaken by ad-hoc project teams. Instead, the work should be institutionalised as the regular responsibility of MAS, of course still working closely with the private sector. In this sense, the FSRG has now fulfilled its role.

47   We were right to continue to push the changes in the financial sector despite the crisis around us. This strategy will not yield quick returns, but it sends a clear signal that we are determined to develop our financial sector, and have the resources and the ability to do it. We are distinguishing ourselves by liberalising and pursuing market oriented policies. I hope your positive and valuable contributions will continue to be forthcoming. Let us persevere in this task, so that when the storm clears, we will find ourselves well ahead, and closer to our goal of becoming a premier international financial centre.

1 MAS will accept as Upper Tier 2 debt instruments that are of at least 10 year maturity or perpetuals, are non-redeemable by holders, and which contain interest deferral and loss absorption features.

2 The BIS standard allows Tier 3 capital, such as subordinate debt of 2-5 year maturities, to be used to provide against market risk.

3 Equity-like capital instruments that meet MAS requirements will be allowed for up to 15% of Tier 1 capital, following the BIS standard.