Banking (Amendment) Bill
- 2nd Reading Speech -
By Mr Lee Hsien Loong, DPM, Singapore and Chairman, MAS
Date: 16 May 2001
1 Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."
2 In the past few years, the MAS has progressively changed the way it supervises the financial sector. Our objective of ensuring financial stability is unchanged. But in order to have a more dynamic and vibrant financial sector, we have shifted emphasis from regulation to supervision. We have moved away from one-size-fits-all laws and regulations, towards tailored supervision of individual institutions according to each institution's financial strength, risk management capability and risk profile.
3 The most important changes have been to the banking sector. Banking is not just the biggest industry in the financial sector. A sound and dynamic banking sector is critical to financial stability and to the entire economy. We need to attract quality international banks, and at the same time build up strong local banks able to compete against the best.
4 In May 1999, MAS launched the first phase of the liberalisation of the banking sector. We introduced greater foreign competition, removed foreign shareholding limits on local banks, and raised standards of corporate governance and disclosure. We required banks to form nominating committees to vet key appointments - directors and top executives.
5 In June 2000, we required banks to separate their financial and non-financial businesses, and unwind the cross-shareholdings within the local banking groups. This was to limit the risk of contagion from non-banking businesses to banks, improve the banks' corporate governance, enhance transparency of transactions and market discipline, and ensure that bank managements focus their attention on the complex business of banking in an increasingly competitive environment.
6 Besides these major initiatives, we have been updating and streamlining many banking regulations, for which the underlying objectives are either no longer valid or not being effectively met. We have amended rules to give banks greater business and operational flexibility without compromising prudence. We have also adopted a risk-focused supervisory approach that enhances our oversight on banks without increasing their cost of regulatory compliance.
7 Reviewing our supervisory framework for the banking sector is a continuous process. Several important pieces have been put in place, and more will be done over the next few years. The enactment of the Banking (Amendment) Bill will give legislative effect to new policy changes announced in the past year. The Bill will also introduce several new changes to bring the Banking Act up to date.
8 In preparing the Bill, MAS has consulted widely with the industry through the Association of Banks in Singapore, and with accounting and legal practitioners. The individual amendments to the Banking Act are explained in the explanatory statement to the Bill. I also circulated a separate Explanatory Note to members, following the First Reading of the Bill. Today I propose to speak in detail only on the major changes.
GIVING EFFECT TO ANNOUNCED POLICIES
9 In terms of giving effect to announced policy changes, I shall discuss three main ones: (1) separation of financial and non-financial activities; (2) revision of ownership rules for local banks; and (3) reduction of paid-up capital requirements for local bank subsidiaries.
Separation of Financial and Non-Financial Activities
10 New sections 30 to 35 will prohibit banks from carrying out any business which is not banking business, other financial business regulated or authorised by MAS, or business which is incidental to financial business. Business incidental to financial business includes the provision of clearing and settlement services, custody, trustee and nominee services, financial advisory activity as well as agency transactional services where the banks act as agents for third party products but take on no additional risk themselves.
11 Banks will have to obtain MAS' approval before acquiring a major stake in any company. If the company being acquired carries on non-financial activities, MAS will generally withhold consent, although it may grant approval if, after discussion with the bank, it is satisfied that there are clear synergies with the bank's financial business. Over time, MAS will be able to develop a list of such approved non-financial businesses, so that banks need not seek our approval for each acquisition. The list will naturally have to be regularly updated. The financial industry is rapidly evolving, and it is not possible to define a static list of approved activities.
12 While banks should not venture into non-financial activities, we do need to allow them some flexibility to own shares in non-financial companies, for portfolio investment purposes. The new section 32 will allow banks to purchase non-controlling stakes (generally 10% or less) in the share capital of any company. To limit concentration risks, the new section 31 will limit equity investments in any single company to 2% of the bank's capital funds, while the new section 33 will revise the rules on a bank's immovable property holdings and lower the limit to 20% of its capital funds.
13 These restrictions on non-financial business will also apply to the branches of foreign banks in Singapore. Contagion and other risks arising from the co-mingling of financial and non-financial businesses can affect all banks, whether local or foreign. The policy is thus relevant across the entire banking sector.
14 In addition, the Bill will prohibit a person from using any logo or trademark in a manner that would imply association with a bank incorporated in Singapore or its subsidiaries carrying on financial business, unless that person is a financial affiliate of the bank or its financial holding company. This will limit the reputational and contagion risks from such name-sharing between the bank and its non-financial affiliates.
15 The Bill will amend section 78 of the Act to enable MAS to make regulations which spell out other detailed requirements on the separation of financial and non-financial activities, including the prohibition on sharing of management between the bank group and its non-financial affiliates, and on cross-shareholdings within the bank group.
16 These new measures will require local banks to undertake significant corporate restructuring and divestment of non-financial assets. To ensure that the process is undertaken in an orderly manner, the new section 34 will allow banks a three-year grace period, from the time that the new amendments take effect, to divest any investment assets which they hold at the time. MAS has been in close discussion with the banks on their plans and will continue to keep close watch on the divestment process. There is no reason to force the banks to conduct fire sales in a depressed market. This would be detrimental to the interests of banks' shareholders, and might weaken our financial system. But the banks have to act with due despatch within the three-year period, and I am confident that they will do so.
Revision of Ownership Rules for Local Banks
17 When MAS lifted the 40% aggregate foreign shareholding limit for local banks, it had also introduced a new shareholding approval threshold of 12%, to be added to the existing thresholds at 5% and 20%. The Bill revises sections 15 to 18, which relate to the approval of controllers of Singapore-incorporated banks, to ensure that control rests with individuals or groups whose interests are aligned with the long-term interests of the Singapore economy and the national interest. The new 12% threshold gives greater flexibility to MAS to allow strategic partners and large institutional investors to reach and cross the 5% shareholding level, without having to also allow their stakes to grow unrestrained up to 20%.
18 The amended sections will also address passive increases in shareholdings and shareholders acting in concert. Legislative powers will be introduced for the Minister to object to persons who were previously allowed to exceed the threshold levels but who subsequently become unacceptable as significant shareholders.
Reduction of Paid-Up Capital Requirements for Local Bank Subsidiaries
19 The Bill provides for a reduced minimum paid-up capital requirement of S$100 million for banking subsidiaries of Singapore-incorporated banks which have themselves met the S$1.5 billion capital requirement. (This will be in a new section 9A to be inserted in the Banking Act.) This was announced in July 2000 as part of MAS' internet banking policy. The reduced paid-up capital requirement facilitates the setting up by local banks of banking subsidiaries which adopt new business models, such as Internet-only banking. These new banking subsidiaries may be set up together with joint venture partners provided the parent local bank retains control.
NEW POLICY CHANGES
20 As for new policy changes contained in the Bill, I shall elaborate on four main ones: (1) revision of banking secrecy provisions; (2) prohibition of unlicensed deposit-taking services; (3) flexibility for MAS to prescribe capital adequacy requirements on a supervisory basis; and (4) revision of methodology for regulating property-related exposure.
Revision of Banking Secrecy Provisions
21 The banking secrecy provisions of the Banking Act protect the confidentiality of customer information. Tight banking secrecy is important to maintaining the confidence of customers in our banking system. However, our present banking secrecy provisions have impeded banks wanting to take advantage of potential operational benefits and savings. For example, banks find it difficult to securitise mortgage loans, or to outsource data processing to third parties. MAS has reviewed the banking secrecy provisions in consultation with the industry. We have considered both the operational requirements of banks and the need to preserve customer confidentiality. The measures set out in the new section 47 strike a careful balance between these two sets of considerations.
22 The new section 47 will stipulate a wider set of circumstances under which banks can disclose customer information, and the terms of such disclosure. These are set out in a new Sixth Schedule, which consists of two parts. Part I will contain many of the existing exceptions, and Part II will contain most of the new exceptions to the secrecy provisions. Examples of new exceptions are the disclosure of credit information in a sale or transfer of credit facilities (e.g. asset securitisation), and the disclosure of customer information to a bank's head office for risk management purposes. Two key points about the new exceptions are first, only very few exceptions have been allowed for the disclosure of information relating to a customer's deposit and funds placed for investment; and second, a person who receives customer information will be required by law to keep the information confidential.
23 These measures ensure that by law, all banks will provide a basic level of customer confidentiality to all their customers. Beyond this legal minimum, individual banks and customers may reach their own contractual arrangements offering higher standards of confidentiality. The Act does not compel a bank to invoke the newly introduced exceptions if the bank deems this to be in the best interests of its business and its customers.
Prohibition of Unlicensed Offering of Deposit-Taking Services
24 The taking of deposits is an integral part of banking business regulated under the Banking Act. However, under current provisions in the Banking Act, deposit-taking on its own is not a regulated activity. A company is only considered to be conducting banking business if it carries out three related activities - deposit taking, extending loans, and providing customers with chequing facilities. Hence, a company set up to take deposits in Singapore which does not also grant loans and provide chequing services would not need to meet MAS' licensing requirements or abide by the Banking Act.
25 But new business models have emerged in the changing banking industry. Some banks now operate using an Internet-only strategy. They take deposits but do not extend loans, yet there is no doubt they are banks, and need to be regulated like banks. We therefore need to update the legislation.
26 The Bill will introduce new sections 4A to 4C to generally restrict deposit-taking in Singapore in the course of a deposit-taking business to institutions licensed by MAS or specifically exempted. The new provisions will also prohibit offers, invitations and advertisements to the public in Singapore to place deposits with any deposit-taking business. Again, this does not apply to institutions licensed in Singapore or specifically exempted.
27 These new rules will accord the public a measure of protection. But they do not prevent anyone from seeking out on their own, via the internet or other means, the services of financial institutions operating overseas. Persons who choose to do so take their own risks.
28 I also wish to assure the House that the new provisions are not meant to restrict capital market fund-raising by corporations which are not carrying on deposit-taking business. Such companies issue bonds and notes from time to time, and these will generally not be considered deposit- taking business. Where necessary, MAS may make further exemptions to clarify that capital market fund-raising activities are not restricted by the new provisions.
Flexibility for MAS to Prescribe Capital Adequacy Requirements on a Supervisory Basis
29 Section 10 is amended to enable MAS to impose, on a supervisory basis, specific capital requirements over and above the statutory minimum that apply to all banks, and specific capital adequacy ratio requirements that vary from the stipulated minimum of 12%. This amendment allows MAS to impose capital requirements appropriate to an individual bank's risk profile and management capabilities. This risk-focused supervisory approach is being increasingly recognised and followed by regulators in other key financial centres. After the enactment of this amendment, MAS will engage each bank in an ongoing consultative process to determine the appropriate level of capital that it should maintain.
Revision of Methodology for Monitoring Property-Related Exposure
30 It is important to effectively monitor and limit banks' exposure to the property sector in order to minimise the vulnerability of the banking system in a property market downturn. Section 34 of the existing Banking Act (which will be the new Section 35 in the amended Act) limits loans secured by "immovable property for the purpose of purchasing, improving or altering" that property to 30% of the bank's deposits in Singapore. This statutory requirement will be repealed and replaced by a section empowering MAS to make regulations to limit banks' property-related risk.
31 This is another facet of the risk-focused supervisory approach. In some jurisdictions, the law does not prescribe any limits to the exposure of banks to the property market. It is left entirely to regulators to exercise supervisory discretion. In Singapore, a major part of the banks' lending comprises loans that are directly or indirectly related to property. This is because of the structure of our economy. Many manufacturers are MNCs who depend on their own sources of financing rather than on local banks. Rather than leave the matter entirely to the discretion of the regulator, we have decided that the Banking Act should explicitly spell out the scope of MAS' supervision of banks' property exposure, while leaving the specific approach and degree of tightness to MAS' judgement.
32 Upon the enactment of the Bill, MAS intends to implement, via regulations, a new methodology to monitor and limit property-related exposure. The old methodology is unsatisfactory in several ways.
33 First, it only limits loans secured on immovable property, and fails to capture loan exposures to the property sector that may not be secured on property, e.g. a general loan to a property developer. The new methodology will impose a limit on all loans and debt instruments for the purpose of property development or investment, whether or not it is secured on immovable property.
34 Second, the old methodology limits property exposure to a proportion of the bank's deposits. But deposits can be inflated by borrowing via the inter-bank market. The new methodology will limit property loans to a proportion of the bank's total non-bank loans and debt instruments. This encourages healthy diversification in the bank's loan portfolio.
35 Third, the old methodology includes owner-occupied housing loans secured on the property. The new methodology excludes owner-occupied housing loans from the limit, recognising that its risk of default is lower than other property loans. Owner-occupied housing loans will be subject to separate supervisory limits where warranted, according to the circumstances of each bank.
36 MAS intends initially to set the limit on banks' property exposure at 35% of its total loans and debt instruments. The main banks are all currently below this limit. For the handful of smaller banks which currently exceed the limit, MAS will grant them a short grace period to bring down their ratios.
37 To avoid any misunderstanding that this change is intended either to tighten or loosen bank lending to the property sector, let me state explicitly that this is not the case. Our aim is rather to enable MAS to more accurately monitor and limit banks' exposure to the property sector. Whether the 35% limit will be tightened or loosened is an entirely separate policy decision that will be considered in the future, and will depend on our view of the risk profile of the banking sector, and our view of risks in the property market at that time.
38 I would now like to take the House through the rest of amendments that will be made in the order that they appear in the Bill. These include:
Adjustments to the provisions in section 9 on capital requirements for foreign banks to allow the bank's issued and paid-up capital or its equivalent, and the bank's reserves, to count towards the S$200m capital requirement;
The repeal of the rule in section 24 prohibiting payment of dividends by banks until all capitalised expenditure is written off. This is in line with new accounting standards that require goodwill to be amortised over a number of years;
The repeal of provisions in section 25 empowering MAS to determine the form in which a bank publishes its accounts. This is no longer necessary because MAS does not prescribe the form of presentation, verify the accuracy of the accounts or decide on any other details in relation to the bank's accounts. This is and should remain the responsibility of the Board of the bank and the bank's external auditors;
Amendment of section 62 to clarify that Singapore-incorporated banks are able to issue subordinated debt that qualifies as regulatory capital;
The updating of penalties in the Banking Act to underscore the importance of sound prudential standards. In general the penalties have been multiplied by a factor of 5. This is not excessive considering that many of the penalties have not been revised since 1984, and some have been unchanged since 1970.
39 Mr Speaker Sir, these amendments to the Banking Act will implement key measures to strengthen MAS' risk-focused supervision of the banking sector, upgrade the local banks, and provide all banks with greater operational flexibility. MAS is currently reviewing policy changes to other areas of our supervisory framework. A new Banking (Amendment) Bill will be tabled once the next major pieces are ready, probably next year.
40 Mr Speaker, Sir, I beg to move.