Date: 11 Jul 2001

Introduction

1   Mr Low Thia Khiang asked whether bank mergers will help make Singapore an international financial centre.  Mr S Iswaran and Dr Ker Sin Tze asked about the effects of consolidation on competition and the availability of banking services to SMEs. These are important questions prompted by the process of consolidation that is currently underway. OCBC has made a bid for Keppel Capital Holdings, which owns Keppel-TatLee Bank, and DBS and UOB have made competing bids for OUB.  If these offers are successful, we will have fewer but larger local banks.

2   Many Singaporeans are understandably concerned about how consolidation might affect them. I appreciate their concerns.  Let me explain why consolidation is unavoidable for the banking industry and more importantly good for Singapore, and how some of these concerns can be met. 

Importance of Consolidation

3   The banking industry is undergoing dramatic change everywhere.  Unless the local banks upgrade themselves and keep up with the changes, they will become weak and marginalised, even in Singapore. Consolidation is a worldwide trend in banking, and is an essential element in the upgrading of local banks.
 
4   In the past, the local banks could maintain their market positions and grow organically as the economy grew year by year, so long as they conducted their business prudently and avoided mishaps. But that was in a different environment, with limited foreign competition and a slow pace of innovation. Today competition is fierce and technology is changing rapidly. The industry is characterised by large economies of scale, putting a high premium on size. Investors demand that banks earn competitive returns, or else they will punish their share prices. Small banks simply do not have the resources to compete. They are unable to out-perform larger banks, either in quality of service or in returns to shareholders.

5   Even large international banks, many times the size of Singapore banks, feel the pressure to grow still larger. They have been merging among themselves, becoming what analysts call "Godzilla" banks. Deutsche Bank, at one time among the largest banks in the world, feels the need for a merger partner. Smaller banks throughout the world have merged with each other or have been swallowed by these Godzilla banks. The largest of the Godzilla banks is Citigroup, with an estimated 100 million customers. HSBC has 20 million, and ABN Amro 13.5 million.  Their size enables them to invest billions of dollars in the latest technology and sophisticated systems. Because they can spread these costs over millions of customers world-wide, they can efficiently deliver a wide-range of customised products at low unit costs.

6   The result is fewer but much bigger banks. Over the last decade, the number of banks in small countries has fallen significantly. In Sweden the number fell by 75%. Switzerland, with a GDP and population about twice our size, now has only two big banks - UBS and Credit Suisse - both  world-class players.  The Netherlands, four times as big as Singapore, has three - ABN-Amro, Rabobank and ING, plus Fortis which is partially Belgian.  Australia, which is slightly bigger than the Netherlands, also has 4 big banks. 

7   Singapore's economy is 1/4 the size of Australia's.  Singapore cannot support 5 local banks.  Our biggest bank DBS, even after the merger with POSBank, is ranked only 115th in the world by asset size. The logic of Singapore's circumstances is inescapable:  if we want strong banks, then they have to be big banks, and if they are to be big banks, then they must consolidate.

8   Any merger between the local banks will not create a Godzilla bank. The merged entity will still be small by international standards. What the Godzillas are doing involves scale economies that the local banks cannot get anywhere close to. Some might argue that therefore whether the local banks are very small or just small makes no difference to their ability to compete. But this view is incorrect. Local banks can derive meaningful scale economies if they merge, especially in attracting talent and building capabilities. Local consolidation can create viable Singapore banks that can hold their own in the local market without government protection, and compete in selected foreign markets. They will not compete globally with the big players, nor can they compete in every product line. But they should be strong enough to avoid being completely marginalised, at home and in Asia. They will be in a position to expand through careful acquisitions abroad over time, rather than be left with no choice but eventually be acquired by foreign players.

9   Many of the giant international banks are already operating in Singapore, some since before the local banks were founded.  They have a large share of the wholesale banking market, serving large companies and international customers.  Several have sizeable retail operations as well.  If the local banks remain small, they have no hope of making the necessary investments in technology, or attract the talent to compete with these world-class foreign players.  Their service standards and product range will fall behind.  Customers, especially the more sophisticated ones, will take their business to the foreign banks. 

10   This will happen even if we do not liberalise the banking industry.  The more innovative foreign banks here have been able to grow their market share despite the restrictions that MAS has placed on their operations.  Over time, local banks that cannot compete would become weak and marginalised.  At best they would operate at the fringes, serving niche markets.

11   This would not be a good outcome for Singapore. Banks are a core part of our financial system and affect the stability of the economy.  Without a group of strong and well-managed local banks, we risk instability in the event of an economic or market crisis.  We saw this in many Asian countries during the Asian financial crisis.  It is not prudent to rely solely on the foreign banks because in a crisis, banks which are more deeply rooted in Singapore will be more likely to act in support of our financial and economic stability.  Foreign banks will have large global operations, but the commercial interests of local banks will be more closely aligned with that of the Singapore economy.  That is why MAS remains committed to fostering strong local banks with a major share of the domestic market. That is why we need banking consolidation.

Competition in the Banking Industry

12   Mr Iswaran has expressed concern that large banks will engage in anti-competitive practices to the detriment of small depositors.  The Government will not allow an enlarged bank, or a few dominant banks, to use their market power to engage in monopolistic or anti-competitive practices, that diminish consumer choice or block entry by other players.  MAS does not think this is likely.  None of the post-merger banks will be big enough to be over-dominant.  Even if OUB merges with one of the larger banks, their combined market share of non-bank deposits will be about 30%, still significantly less than the share of the largest banks in other small countries. The single largest bank in Finland has about 40% market share, about the same as the combined market share of HSBC and Hang Seng Bank in Hong Kong.

13   As a small country, we have to accept a more concentrated banking industry, in which the largest banks have a sizeable market share.  MAS believes that there will be sufficient competition in the banking industry even after consolidation. The foreign banks will probably increase their share of the retail market and will provide vigorous competition.  MAS' banking liberalisation programme will enhance this competition.  Nevertheless, the Government will keep a watchful eye over the development of the industry, and be vigilant against any abuse of market power.  The Competition Act that MTI is now considering will help us to do that.

Small Depositors

14   Mr Iswaran is also concerned about the effect of consolidation on the provision of banking services to small customers.  The Government will ensure that low-income Singaporeans continue to have access to basic banking services at affordable prices.  We do not expect this to be an immediate problem.  Charges, where they have been levied, have been modest.  Most of the local banks, especially DBS, already provide a basic banking product for small depositors at affordable prices.  We expect this to continue after consolidation. 

15   However, in the longer term, banks will feel pressure to earn competitive returns for shareholders.  This will happen even without consolidation.  Competition will force banks to watch their bottom lines more closely, and to make each product breakeven.  It will become harder for banks to continue to cross-subsidise services that they used to provide for free or below cost.  That was a luxury affordable only in a protected market where profits came easily. 

16   In many other countries like Australia and the US, fees and charges for various banking services exist together with robust competition. Governments and the banking industry have developed guidelines or requirements for all banks to provide affordable services to lower income customers. Banks in Singapore will face the same market pressures, so we need to consider similar solutions. 

17   I stated the Government's position on this in my speech to the Association of Banks in Singapore on 29 June. The Government will ensure that low-income Singaporeans continue to have access to basic banking services at affordable prices. However, we cannot insist that the services be completely free.  Banks are businesses and have to recover their costs. Public transport and electricity are daily necessities for most Singaporeans. Neither bus services nor electricity supplies are free, but both are affordable. 

18   The Association of Banks in Singapore has already encouraged all banks that engage in consumer banking to provide affordable basic banking services to lower income Singaporeans.  MAS welcomes this, and is optimistic that these banks will find ways to meet this need.  The Government will monitor the situation closely.  When it becomes necessary, MAS will require all banks with significant retail operations in Singapore to provide basic banking accounts with defined minimum features to low-income Singaporeans.

Small and Medium Enterprises

19   Dr Ker Sin Tze suggested that one or two small banks be preserved to serve SMEs.  Unfortunately, this is not viable. The Government cannot require the banks to remain small when commercial pressures require them to have scale to be viable.  This would be unfair to the shareholders of the small banks. The banks themselves analysed their situation and decided that it was no longer commercially viable for them to remain small. This set in train the consolidation process. 

20   It is not likely that small banks can serve SMEs better than big banks over the long run.  Smaller banks will have fewer resources to cater to the needs of SMEs, and their costs will be higher. A large bank with a well-diversified portfolio should be able to fund a larger number of SMEs than a small bank with a more concentrated portfolio.  And during an economic downturn, a large bank is better able to maintain its credit lines to SMEs than small banks.

21   All the local banks have maintained an interest in serving SMEs. They recognise that SMEs are an important segment of the market. DBS' Enterprise Banking Group has recently opened five Business Centres dedicated to serving SMEs. Keppel TatLee Bank continues to focus on the SME market, offering a wide range of financial services tailored to meet the needs of the market. OCBC, which has bid for Keppel TatLee Bank, has established a new Emerging Business unit to cater to the needs of SMEs.  I do not expect consolidation to affect this interest of the local banks in SME lending.

22   One concern of SMEs arises because some have previously borrowed separately from two banks. If the two banks now merge, will the merged bank cut back their total credit limit? I believe that while the merged bank will want to reassess its exposure to the borrower, it is unlikely to cut back its lending simply because of the merger. If the SME was able to service separate loans from the merger partners earlier, it should have no difficulty continuing to service the same total quantum after the merger. The bank has no reason to want to lose a good customer, and shrink its loan book overnight.

23   From a supervisory point of view, it is the large loans rather than small ones which can expose the bank to excessive risk. These large borrowers are more likely to be large companies and not SMEs. The Banking Act imposes a limit of 25 percent of a bank's capital funds on its exposure to any single borrower. However, should a bank merger cause a large borrower to exceed this limit, MAS will give the bank a reasonable time to reduce its lending below the statutory or supervisory limits.

24   The local banks are not the only sources of funding available to SMEs.  Finance companies and some foreign banks have significant SME portfolios, and products that cater to the needs of SMEs.  In addition to commercial credit, the Government also has financing schemes to assist SMEs, such as the Local Enterprise Financing Scheme administered by the Productivity and Standards Board.

Conclusion

25   The banks must change and keep up with international best practices to remain competitive.  We cannot take for granted that our local banks will remain strong. The banks know this and are in the process of consolidation.  The result will be fewer but bigger banks. The Government views the consolidation among the local banks as a positive development.  If it is well executed, a stronger group of local banks will emerge, able to hold their own domestically, and compete in the region. In the long run, this is the only way to provide Singaporeans with banking services that are competitively priced, affordable and of a high standard.

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