Date: 17 May 1999

Q1. In the statement it is mentioned that you want to keep the market share of domestic banks to 50%. How are you going to keep this and what is going to happen if it goes below 50%?

A1. Well in the statement we have stated our position carefully. Firstly I think the way we have structured our package, we have given local banks some time to upgrade and adapt and make sure they hold their own. It is not an overnight freeing up of all restrictions; it is a phased adjustment. They have afew years to get their act together and to shift. So I don't expect a sudden drastic change as a result of this package.

Secondly, I think the best response for making sure the local banks maintain their market share is to upgrade and to meet the challenge. You can make adjustments and tighten up the rules or fine tune the package but to shift the pace of liberalisation and scope of the liberalisation, but finally if you don't have strong players in the centre, all your walls and defence will be in vain. So the best solution is for the local banks to rise to the challenge and upgrade themselves. And we have discussed this with local banks and they know it is absolutely serious matter.

Thirdly of course, if the unexpected does happen and to our surprise within the next one or two years, because of this package, there is sudden shift in the market share, then we have to take a step back, and re-assess the position and decide what we will do. Whether we need to tighten up, whether we need to slow down or whether we need to restructure the package, but I think the first defence is to make sure we live up to it and we don't hit the 50% line.

Q2. How will the local banks phase in the merger of the local and foreign tranches of their shares?

A2. First, they have to decide whether they want to do it and if so, how they will do it. I think they will make some announcements to this effect today.

Q3.Some people will say that by still setting restrictions on number of branches and off-site ATMs, you will be micro-managing the liberalisation. Since you will be setting the limit on the number of QFBs, why not let them have full and unfettered competition?

A3. We are being careful. This is a first step. We will look at what happens after three years and decide what to do next.

Q4. Under the provision that re-appointments of CEOs and other top officials of local banks have to be approved by MAS, is it possible that someone who has been a CEO of a domestic bank for many years could be removed by the MAS?

A4. If the CEO has to be reappointed, and the shareholders have to re-decide on the matter, then the MAS would like to take another look at the re-appointment. Re-appointments normally refer to directors rather than CEOs, because once you appoint a CEO, it is not usually for just a fixed one or two year term, but for a long term basis. However, directors are regularly re-appointed and re-appointments are by no means automatic. There is no job tenure and I think it is wise to take a look at the appointment when the shareholders take a look at the matter.

Q5. If a bank drags its feet on appointing a Nominating Committee as required, what will the MAS do? Is there a deadline for appointing this Committee?

A5. MAS will issue a Directive that local banks have to constitute Nominating Committees within a reasonable period, and I do not doubt that they will do so.

Q6. What exactly do you mean by upgrading? I mean if you ask Peter Seah, he will say that he has this programme, while if you ask OCBC, they will have another programme. So do you mean by upgrading, merging the banks?

A6. Upgrading means at the end of this exercise with stronger foreign competition, the local banks are there holding their own; maintaining their market share, being profitable and operating safely, competently and professionally. It also means high quality governance and management, good services to their customers, good returns to shareholders and peace of mind to their supervisors in the MAS. There are many ways that banks can do this. Not all the banks will do the same thing. Some want to look at regional activities, some will want to focus on traditional markets, and some may want to go for more selective higher market segments. It really varies depending on their business strategies.

Q7. The statement only mentions the sharing of ATMs amongst QFBs. I presume that rules out the sharing of ATMs with local banks and also foreign banks joining NETS?

A7. No, that's a separate matter. We have decided to take it step-by-step. So as the first step, we will allow the QFBs to share ATMs among themselves, which is quite a lot of ATMs because it just isn't the off-site ATMs which we are going to allow, but also the on-site ATMs which the QFBs presently have. For the sake of argument if you take for instance a foreign bank with a large number of branches here, e.g. Stanchart which has over 20 branches, if they become a QFB, all those branches have ATMS which if they put into a pool, could be available to other QFBs. So it is quite a substantial network.

Q8. The increase in S$ lending limits and undertaking of S$ swaps, for offshore banks - do you see this as another step toward internationalisation of the S$?

A8. Our S$ internationalisation policy hasn't changed. These are marginal adjustments. It is a little bit of liberalisation, a bit more flexibility, probably a little bit of help for the bond market because for offshore banks in general, the source of the S$ will be from bond issues which they manage.

Q9. Did you look at the role of the regulatory regime itself? In some jurisdictions, the countries have decided to split up the regulations of say capital markets from retail. They have a commission that looks after the retail business and tied to that is the issue of the role of non-banks and non-financial institutions in retail financial services today, like sharing of data with outsourced agencies, ATM networks run by non-banks and things like that.

A9. (Answer by Tharman Shanmugaratnam) In countries where there are separate agencies looking at "retail business", they actually look after the consumer across the board, be it in securities, or insurance or banking. That's not something we're immediately embarking on because we believe the present system of consolidated supervision is serving us quite well.

Q10. This new requirement for Nominating Committee seems suspiciously aimed at the family-controlled banks. Can you confirm that's the case?

A10. No, we've said quite clearly what the purpose is, which is to strengthen corporate governance and make sure that people are appointed on merit, and that appointees to the Board as well as to senior management appointments are there looking after the interests of all shareholders. We've studied how other established jurisdictions and other very well established financial institutions manage this because it's not a problem unique to Singapore. In every case, you'll need a certain stability so that the bank is in good hands and you can be assured of it as far as possible by the institutional arrangements. On the other hand, there must be the room for shareholders to make their views and pressures felt because the institutions are ultimately accountable to their shareholders. It's like the way you've to design a government in a country. After studying it, we discovered that many banks around the world particularly in America and also in Australia have mechanisms like this and the Nominating Committee is modelled after what some institutions in the US do. So I think there are good reasons for doing this.

And it's absolutely right that banks in Singapore, even though they began as family banks and still have families as the most significant shareholder, operate in such a way that they put the interests of all shareholders equally and also have the interests of Singapore in mind. They have grown big as a result of government policy, for a purpose as stated in the paper - which is that we wanted to have stability and depth and resilience in our banking system to make sure that in a crisis, particularly if it's a major shock, there will be players in Singapore who'll have long term interests aligned with Singapore's interests. So there was a purpose for this and the banks would have to serve this purpose.

Q11. How effective do you think these measures will be in encouraging the banks to merge and consolidate? You seem to be putting a high priority on that for the good of the financial system. How effective do you think these measures will be in achieving this goal?

A11. I will not say anything until after something happens. As we have explained before, we encourage consolidation but it is not within our powers to dictate the configuration which emerges. The shareholders will have to decide and it has to make business sense. A scheme has to be worked out in which both sides are committed to, and will carry out wholeheartedly. If you just dictate a merger and the partners are incompatible, then there will be a failure and it would be worse than not having tried. The incentives are clear. And the imperatives are also very clear. For if the local banks do nothing, at best they remain small players, and at worst, they will find their long term existence in peril. I think the local banks fully understand this.

Q12. You say you will issue up to 6 new licences for the new category called QFBs. Can you elaborate on the criteria? Do you expect a certain amount of pushing and shoving? Does Citibank go to the head of the queue? Or who is going to be, since there is not a great number (6)?

Secondly, you also said those full banks who are not QFBs will retain their privileges, and on a case-by-case basis, be allowed to re-locate branches, but what about the ATM network? Will they be allowed to go under the QFB?

A12. We've stated the criteria for who becomes a QFB; which is their credit and legal ratings over the last three years; their track record of compliance and the strength of their internal control systems; and thirdly, what they commit to contribute to developing in Singapore to help us become an international financial sector.

I hope there will be some pushing and shoving, because there ought to be some competition for it. This is one reason why we had not said, say 20 QFBs. Because if you overdo this and just open up and have a sudden influx, all sorts of unpredictable consequences may occur. The Australians did this. They offered six at the beginning when they liberalised some years ago, and eventually had a dozen, to everybody's surprise. There was some blood-letting and shake-out afterwards because not every one who came in did well. We have made some soundings in the market and with the banks who would be interested in doing retail banking, and we think six is a reasonable number. There will be interest and we hope there will be some competition for it.

Your second question on ATMs: if foreign full banks don't become QFBs, they will not be in the network.

Q13. In terms of the Scandinavian banks which apparently ran into trouble though over-extending, and major local banks in New Zealand which were bought out by foreign parties, what makes you sure that would not happen here?

A13. We can't be sure. That's why we are proceeding carefully, and installing safeguards wherever possible. There is no absolute guarantee - the statement makes it quite clear in the concluding paragraph. If we stand still and do nothing, we are definitely at risk. If we move forward, it is not risk-free, and it is not automatic that we will end up with sweetness and light everywhere. But we think that if we proceed carefully, step by step, and with safeguards like the Nominating Committee, like controlling the number of QFBs, restricted banks, ATMs and branches, then if anything goes wrong, we will have time to notice it and react to it.

Q14. On the QFBs, how does that tie in with the ambitions of Singapore banks wanting to regionalise because some countries give out banking licences on the basis of reciprocity? Would you would allow foreign banks in on the basis of reciprocity? The second question is about the possibility of foreigners being CEOs of Singapore banks.

A14. Well, reciprocity is one of the matters we can consider. But there are constraints because under the WTO, rules have to be on an MFN basis. And financial services are now under the WTO. So I think it depends on which areas we are constrained to do it MFN, and which areas there is room for bargaining and negotiation. As for foreigners as CEOs, I see no hindrance. We have already got two. It really is the best man for the job. DBS has one. OCBC has one. But they report to Singapore boards and they are Singapore banks.

Q15. MAS said it will lift the 40% foreign shareholding limit on local banks. Technically that means foreign investors can own up to 100% of the local banks. Do you foresee any ugly take-overs or acquisitions?

A15. You cannot say what will happen. What we have put in place is to make sure that if foreigners take over and have more than a certain percentage which is above our thresholds, they have to get approval from us. Because if they accumulate shares beyond say five, twelve or twenty percent, which is what is specified, then we can either order them to divest, or rule that even if they hold all these shares they will not be allowed to vote the voting rights matching these shares. There are such provisions in many jurisdictions. So I think there are safeguards. Owning the shares is one issue. Taking effective control of the bank is another level. It is not automatic that if you own some shares you will run the bank because there are significant Singapore shareholders.

Q16. You said owning the shares does not mean taking control, but how would foreign investors react to this? Isn't it ironic that you are opening up the banking sector and yet saying that they you can own the shares but not control the bank?

A16. Not at all. These are standard safeguards that every country puts in.

Q17. The statement says that MAS will expand and clarify the definition of collusion under the Banking Act. When will the expanded definition be out? And in particular, what form of collusion under the more liberalised landscape are you concerned with?

A17. (Answer by Tharman Shanmugaratnam). We are really just following what we think is best practice. If you look at Hong Kong for instance, it has got tighter definitions of collusion than we have. We have had a relatively open definition because the issue hasn't arisen so far but now that we are lifting the 40% limit, we think it is best to adopt best practice when it comes to these definitions.

Q18. On the provision that the MAS can approve the nomination of a director or the re-nomination of director, what circumstances can you envision that MAS would withhold the approval of a director or the re-appointment of a director? You also mentioned you don't want to speak about bank mergers until there is something to talk about. Do you anticipate something to talk about some time soon?

A18. We have set down in paragraph 28

the criteria, which the Nominating Committee will apply when identifying candidates, and MAS will use the same procedures. But we are a back-stop. The first line of this judgement lies with the Nominating Committee, and with the banks and their shareholders.

Q19. Is the MAS prepared to allow 100% foreign ownership of a bank in Singapore.

A19. I would be very astonished if that comes about. These are local banks with significant local shareholdings. Now that we are lifting the 40% limit, I imagine the foreign shareholding will increase some, but I very much doubt it will increase to an extreme. I also don't think it is Singapore's intention to allow the banks to be under foreign control. That is the whole purpose of having local banks.

Q20. You have a maximum number to the number of qualifying full banks but you didn't mention anything about the qualifying offshore banks. Is there a limit?

A20. There is no fixed number. They will apply and we will judge the applications.

Q21. Banks' boards right now comprise of men probably in their 70s and 80s. Do you envisage local banks to appoint a whole new board of directors? And how do you define your criteria for people who would qualify to be on the board of banks?

A21. Paragraph 28

spells out the criteria. It is really up to the local banks. I think the local banks' boards have been very stable for long periods of time. It may be that in this new circumstance, they may wish to have a greater degree of turnover, but this is for the banks to decide.

Q22. In your opinion, do the local banks have a majority of independent directors currently?

A22. I don't think the question is whether they have a majority of independent directors now or not. I think the question is whether going forward, in a new environment, will they have to upgrade their management, and their corporate governance at all levels, including at the board level? I think the answer to that question will clearly be "Yes".

Q23. You have made several major changes in terms of the consolidation of the exchanges plus these banking reforms. Are you looking at anything else major next or will there be a period of consolidation?

A23. No, this will be the last major component. Implementing this as well as the earlier pieces that we have announced but haven't completely followed through yet will keep us busy for quite some time.

Q24. Will the finance companies also be liberalised? Will they be allowed to have ATMs for example?

A24. That's another issue. We have not studied the finance companies yet. There are various questions that have to be studied including their foreign shareholding limit, because right now they are subject to a 20% limit. We did not revise it when we lifted the bank shareholding limit to 40% and we have not revised it this time. But I think it should be studied not in isolation, but in relation to what role we see the finance companies play in Singapore's financial system. This is a separate study that has to be carried out. But I think there is a clear distinction between banks, which have a full range of services including deposit taking and ATMs, and finance companies, which have a more limited role.

Q25. Will MAS be looking into the issue of interlocking shareholding structure within local banks that was seen by some analysts as a barrier to integration and mergers?

A25. I think this is one of the things that banks will study when they look at their own corporate governance. I notice that Keppel has already been taking some steps to straighten out their cross-lines.

Q26. When you consulted the local banks on this package, in what areas did you encounter the most resistance? Was it a case of a lot of "horse trading"?

A26. There was no "horse trading". It is our responsibility to decide. But we wanted to know how it will impact the local banks, what will work and what would cause problems, and hear their views when they have legitimate concerns, and make the adjustments if necessary. And we have made some adjustments. But I think the thrust of our package has been what we had envisaged. On the 40-60 rule particularly, we had taken quite a long time because we studied various alternatives and floated them with the local banks. After further discussion and looking at overseas examples, we finally hit on this scheme. The local banks have all agreed that

is a good arrangement.

Q27. Why did you choose this time to announce the drastic measures, when your economy is in recession and the region is still not out of the economic crisis. Is it the appropriate time to launch these measures?

A27. We have no time - that is the answer. These are trends which have been sweeping the world's financial industry for the last few years and affecting us too because we are not just part of the regional economy but part of the global financial system as a financial centre. While the region is having difficulties, our banks are sound. If we don't move now and wait a couple of years till the region settles down, we would have lost more time and I think it will be harder for our local banks to make the adjustments and for Singapore to maintain that position at the top as a financial centre. So we have deliberated it carefully and decided to go now.

Q28. The MAS spent a lot of time and received many compliments for consulting the market and discussing with foreign and local banks how to proceed with this. Now that the package is out, do you expect it to [be well-received] in Singapore and offshore, and that it will meet expectations? Do you see this as a sort of 'Big Bang' in Singapore banking?

A28. No, it is not a 'Big Bang'. We have explained many times that we are looking for a series of small steps, rather than any single 'Big Bang' because that is the safer way to do it. We have consulted the industry, and I think that the banks in Singapore, including the foreign banks whom we have asked, will not find this package a surprise and are prepared for it. We are not out for a popularity poll. So if some people wish we have done more and others wish we have done less, it cannot be helped. The test is whether the package succeeds, and that we will only know after a few years.

Q29. In your view, what kind of smaller banking players occupying niche markets would particularly thrive in this liberalised market?

A29. I cannot say. There are some who believe that they can make a living from small and medium businesses in Singapore. But to service small and medium businesses as well, I believe you need to have a big bank and not just a small bank because a small business also needs high quality services. Some banks might wish to try for a niche market looking at high-end customers in Singapore. Other banks might think that they would be able to do well based on a few countries in the region where they have historically been strong. It is really for the banks to decide. The market will show which ones will succeed.

Q30. Do you expect consolidation to result in further job losses in the financial sector?

A30. I think there may be some rationalisation. If we look at DBS, they have been able to manage it quite smoothly, and without any jarring upset to the staff. Keppel Bank has also had some consolidation with Tat Lee, and they have had some job losses. But let's see whether there is consolidation before we talk about the consequences.

Q31. There has been a lot of interest in your comment about

2 large banks. Is there a concern about a cartel effect in terms of pricing of products and services? One bank CEO also expressed concern as to whether there will be sufficient revenue feed to sustain a large bank in Singapore?

A31. Well, the reason I think we are going to end up with 2 major players, or be able to sustain only 2 major players, is because of the size of the market and the fierceness of the competition. So in that environment, if you end up with 2 large banks, I don't think those banks are going to be in a comfortable monopoly position, able to exercise a lot of pricing power. If you look at DBS even with POSBank now, they only have about 20% market share. If you have another large bank formed which would be about the same size, it might be another 20% market share. So I don't think between them they would be able to monopolise the Singapore market and raise prices.

Q32. You mentioned that local banks will be given more regulatory flexibility. Would you like to comment and elaborate more about how you would adjust the minimum capital adequacy ratio (CAR) for them as well as allowing them to set up financial holding companies?

A32. That is something which we will be studying. Financial holding companies is a more straightforward matter because they want to set up a different corporate structure. The holding company will also have to be subjected to appropriate regulation, and there are precedents from elsewhere we can study. The capital adequacy ratio is something which we also have to study. We made one adjustment last year from 12% Tier One to 10% Tier One plus 2% Upper Tier Two. We have to look at it further because if banks are thinking of regional plans and other countries have got different capital adequacy ratios from us, then the question arises whether our CAR applicable to the Singapore operation should also apply to the overseas activities. That depends on the overseas country and the environment there: where it is, what kind of supervision exists there, whether their standards are very much higher than ours or not, and what the risks are for the particular countries where there might be these regional activities. So it is something which we have to study more carefully before coming to a conclusion.

Q33. What is your benchmark? You mentioned that you have 3 years before deciding further liberalisation measures. Is it at the end of 3 years that you want to see 2 major local banks forming or is it at the end of 5 years? What is the worst case scenario?

A33. It is not our business to speculate on worst case scenarios. We are here to make sure that the local banks will upgrade, that there will be more competition in an orderly way, and that the market shares do not shift suddenly. We will assess that in 3 years' time. By that time, we not only have to look at the domestic situation but also the international scene because you don't know how the industry would have evolved by then. There may have been further consolidation. And that may mean something for us. So we have to look outside all the while as we make our moves in Singapore.