Published Date: 13 March 2002

Retail Finance Asia-Pacific Conference and Expo, Singapore, 13 March 2002

The Five "C"s in Banking: Emerging Issues and Policy Responses Speech by Ravi Menon, Executive Director, Supervisory Policy Department & Banking Department, Monetary Authority of Singapore


1   Good morning.  I thank the Lafferty Group and BAI for inviting me to speak to you.  I understand you have gathered here to discuss how to break old models and build world-class banks. My brief is to share with you some of the larger issues facing the banking industry globally, and how Singapore has responded.

2   In the best Singaporean tradition, I have dubbed these issues the five "C"s.  They are:

  • One, consolidation.  We all know that size matters.  But how much does it matter?  And does size always matter?
  • Two, competition.  We need more of it.  But how best to bring it about without creating instability?
  • Three, consumer expectations.  Technology has empowered the consumer.   How best to address consumer expectations?
  • Four, corporate governance.  The Asian crisis highlighted the importance of good governance.  Enron has demonstrated it even more spectacularly.  What more needs to be done?
  • Five, collaboration.  More than ever, regulators need to consult the industry when setting rules and guidelines.  How can we enhance closer consultation and dialogue?

Let me take each of the five "C"s in turn.


3   The last decade has witnessed significant consolidation in the financial industry, resulting in ever larger and more complex firms.  In the US, the number of banks has fallen by 40% since 1980; in the EU, the number has fallen by a quarter since 1985.  This wave of mergers and acquisitions has led to greater concentration in many banking systems.  According to a report published by the G10 central banks and financial ministries1, the assets of the world's 20 largest banks were equal to 40% of the G10 countries' combined GDP in 1998, compared to less than 20% in 1980.

4   Financial institutions are consolidating for two main reasons: scale and scope. Scale primarily enables cost reductions.  This can come through eliminating redundancies in branch networks and functions.  Large firms can also spread fixed costs for sophisticated management systems and expensive IT infrastructure.

5   Scope enables both cost reduction and revenue enhancement, through diversification across geography and products.  To the extent diversification reduces risk, a bank's cost of capital is reduced. The ability to cross-sell a wider range of products and provide customers integrated financial services will yield revenue gains.  Today, financial supermarkets offer banking, securities and brokerage, and insurance products, under one roof or, as is increasingly the case, one portal. 

6   Clearly, size matters.  Indeed, most of the leading commercial banks in the world have got to where they are through mergers as much as through organic growth.  But how much does size matter?  And when does size not matter?

7   First, size does not always confer success.  Not all mergers have succeeded, indeed very many have failed to deliver the desired results.  The G10 report I referred to earlier found that, except for the smallest banks, evidence of cost reduction from increased size, was weak.  There was stronger evidence of revenue gains but these were smaller than expected. A survey by KPMG2  of over 100 cross-border deals found that only 30% of deals increased shareholders' value in the combined companies. These findings do not negate the benefits of consolidation but demonstrate that the benefits can be realised only through rigorous evaluation of synergies, successful integration of diverse systems and cultures, and strong leadership.  Banks operate in a fast changing environment, where product life cycles are short, time to market is critical, and first mover advantages can be decisive. Size should not compromise the agility of the bank.  The aim of consolidation is to create a nimble giant not a clumsy dinosaur.

8   Second, the lack of size does not necessarily imply irrelevance.  In a landscape dominated by conglomerates offering one-stop financial services, specialised players providing niche and boutique services have continued to thrive.  The Swiss private banking houses are good examples.  While banking giants like UBS and Credit Suisse top the tables of private assets under management in Switzerland, the traditional Swiss private banking houses still command a loyal following through their high quality of service and standards of confidentiality. Indeed, the private banking industry illustrates that size is not everything and that giant conglomerates and niche players can co-exist.

9   In Singapore, the industry and regulator alike have been watching these global consolidation trends closely.  MAS' position was clear: we welcomed consolidation among the local banks.  Size was not everything but there was no question that size provided a clear advantage to compete domestically and in the region.  But it was not for the MAS to dictate to the banks whether, when, or with whom they merged.  That was for the shareholders of the banks to decide.  The banks made their assessments and decided that size was critical to attract and retain talent, invest in new systems, and compete in new activities and markets.  And today, the five local banking groups have consolidated into three.  But the banks are deeply mindful that only with successful integration can they realise the expected revenue synergies and cost savings.  And this has indeed been their priority since the mergers.

10   What next?  The competitive dynamics will continue to evolve.  The three Singapore banking groups, which are still small by international standards, will have to continually reassess their strategies, and decide whether further scale is required to compete effectively, and whether this is best achieved through consolidation at home or acquisition abroad.

11   Even as we have welcomed consolidation among the local banks, MAS has been keenly aware of the need to encourage well-managed specialised institutions and niche players to grow their activities in Singapore. They add to the breadth of our financial centre and expand the range of services available to customers. While our admission policy favours large, well-capitalised institutions, we also welcome smaller players such as boutique private banking outfits, specialised insurance underwriters, and asset management houses provided they are reputable, well-managed, and willing to commit resources to building their Singapore operations.


12   Deregulation, technological change, and shareholder pressures to enhance value are injecting greater competition in the banking industry globally.  Competition has in turn fostered greater innovation and efficiency.

13   Keenly aware of this competitive trend, MAS has freed up the wholesale banking market.  Last year MAS announced that all Offshore Banks will be upgraded to Wholesale Bank status over time.  Sixteen new Wholesale Bank licenses were granted in December 2001, and another four will be made available later this year.  And although we have adopted a more phased approach in opening up the retail segment of the banking industry, we have accelerated the pace by bringing forward the second phase of banking liberalisation by almost a year.

14   With two banking liberalisation packages announced almost within two years of each other, what is next?  MAS will continue to liberalise. The package announced last year is substantial: it enhances access privileges to the retail market and opens up the wholesale market to many more players.  Taken together with the first package, the competitive landscape has shifted quite dramatically compared to the situation in 1998. The key remaining restriction now is on foreign banks' access to the local banks' ATM networks.  We will watch carefully how the industry adjusts to the measures implemented to-date before deciding on the next round of liberalisation.


15   Competition helps consumers through lower prices, greater choice, and higher quality of service.  The Internet has empowered consumers by providing opportunities to reduce information asymmetries.   With growing affluence and education, consumers are also demanding more holistic and integrated financial management and advisory services, and diversifying their savings.  This has particular relevance for Asia where households maintain a disproportionate share of their savings in bank deposits.  Bank deposits amount to 120-140% of GDP in countries like Singapore, Hong Kong, and Taiwan, compared to 44% in the US.  With increased financial sophistication, deregulation, and pension reforms, there is considerable potential for higher-yielding alternative channels for savings, such as bonds, equities, unit trusts, pension funds, and insurance and annuity products.

16   But consumer empowerment and choice have gone hand in hand with greater consumer dissatisfaction and anxiety.  The rise in consumer sophistication has been more than matched by the growing complexity of financial products, the bewildering array of choices available, and the increased scope for mis-selling and misrepresentation by intermediaries.   How best to safeguard consumer interests?

17   The MAS has moved away from merit-based regulation of products.  It is neither feasible nor desirable for MAS to prescribe what consumers of financial products can or cannot invest in, how these products should be priced, or how the terms and conditions governing the transaction should be set.  To do so would severely inhibit business enterprise, restrict consumer choice, and raise compliance costs.  The principle underlying MAS' approach is caveat emptor, or "buyer beware".  The consumer must evaluate the product, judge its risks, and take responsibility.

18   But caveat emptor cannot exist in a vacuum.  Some preconditions must be in place: information disclosure, professional business conduct standards, and enforcement mechanisms.  While the challenge of achieving these preconditions is relevant to both the regulator and the industry, we must be clear about their respective roles. 

19   The regulator sets common standards for information disclosure and business conduct.  Indeed, disclosure and business conduct standards have long been in place for insurance, securities, and futures intermediaries licensed by the MAS. The new Financial Advisers Act (FAA) will establish a consistent set of business conduct requirements across all financial advisory activities related to investment products, regardless of whether they are provided by banks, securities firms, or insurance brokers. Requirements are spelt out with respect to product information disclosure, needs analysis as the basis for financial advice, and training and competency requirements for intermediaries.  These requirements will help raise standards of service and professionalism across all intermediaries providing financial advice.  Consumers would be in a better position to make more informed investment decisions where professional advice is given.

20   But statutory provisions and MAS regulations cannot define all aspects of good business conduct standards.  First, many financial services where professional advice is not involved - for example, deposit and loan products, credit card and payment services - will not be covered by the FAA.  Second, and more importantly, principles of fairness, transparency, accountability, and commitment to service standards cannot be comprehensively legislated.  These areas are best addressed through industry-defined codes of good practice.  Indeed, industry associations, in consultation with consumers, have taken the lead in codifying best practice standards in many countries, including Australia, Canada, Hong Kong, and the UK.  Such industry codes set out standards for service quality, disclosure of all relevant fees and charges, transparency in terms and conditions, notification of changes, and redress for customer complaints.  MAS is pleased that the Association of Banks in Singapore (ABS) is in the process of drafting such a code of practice for the banking industry here.  We encourage ABS to work closely with other stakeholders to develop a strong and credible code that aspires to the same high standards of business conduct and consumer service embodied in similar codes of practice in other jurisdictions.


21   Few issues in public policy have risen to international prominence as significantly and quickly as corporate governance.  The Asian crisis no doubt had something to do with this surge in interest.  In trying to understand how rapidly growing economies with sound macroeconomics could so suddenly and decisively succumb to financial and economic crisis, we find the answers in some of the micro dimensions of a country's economic resilience: namely, financial regulation and supervision, risk management culture, and corporate governance.  Indeed, the lessons have been taken so much to heart that good corporate governance now commands a premium among investors. According to a survey by McKinsey3, global institutional investors are willing to pay premiums ranging from 20-30% for the shares of Asian companies they know to be well governed.  There is also growing evidence that the shares of companies with higher standards of corporate governance have been more resilient during economic downturns4.

22. Models of corporate governance vary across countries, reflecting historical, institutional, and cultural factors. The Anglo-Saxon or "market" model has a strong focus on shareholders, is characterised by dispersed ownership, and concerned with maximising return on equity.  The key challenge is to align the interests of management (agents) with those of shareholders (principals).  The Continental European or "stakeholder" model is concerned with meeting the interests of all long-term stakeholders - equity owners, banks, employees, consumers, and even the community.  The principal challenge is to reconcile the often conflicting interests of these stakeholders.  The Asian or "family enterprise" model is characterised by concentrated family ownership and little distinction between managers and owners.  It is concerned with safeguarding the corporation, minimising risk, and maintaining family control. The chief problems with this model lie in building strong and professional management and attracting more equity investment to expand and grow.

23   The various models will continue to evolve over time, borrowing from one another and adapting to new challenges.  Regardless of differences across countries, however, the basic principles of good corporate governance are well-understood and gradually gaining universal acceptance. In the case of banks, these are: (a) separation of banking and non-financial activities; (b) effective board oversight of management; (c) effective market discipline through timely disclosure; and (d) strong external auditors. MAS' efforts to foster good corporate governance have focused on all four fronts.

24   First, we have put in place a policy requiring the local banking groups to separate their financial and non-financial activities, divest control of all non-financial activities, and unwind all cross-shareholdings within these groups.  This will help minimise the risk of non-arms length transactions between banks and their non-bank affiliates, focus management attention on the core business of banking and finance, and limit the risk of contagion from non-banking businesses to the bank.

25   Next, we have implemented measures to enhance the independence and effectiveness of bank boards of directors.  We now have on our bank boards, nominating committees, audit committees, and compensation committees, each comprising a majority of independent directors.  The nominating committee will be responsible for ensuring that those appointed to the boards and key executive positions have the ability to contribute to the bank and to the interest of all shareholders.  Further substantial measures to enhance the independence of bank boards and board committees will be announced shortly by an industry-based group looking into these areas.

26   Third, we have raised disclosure standards on matters pertaining to corporate governance.  Singapore banks have begun to disclose pertinent information on directors and key executives, remuneration of directors and their immediate family members, and related-party transactions including credit facilities to directors and their related entities.

27   Finally, we have been taking steps to strengthen the quality of external audits.   The external auditor is a critical component of a bank's overall corporate governance framework.  The auditor provides the bank's board and shareholders with an independent and rigorous verification of its financial statements and degree of compliance with internal controls and external regulations.  Singapore has taken several initiatives in recent years to promote the independence and effectiveness of external audits, well before the Enron debacle made audit reform a concern of public policy.  Since 1999, local banks have been publicly disclosing all non-audit consulting fees paid to their external auditors.  The banks are also subject to the listing requirement of the Singapore Exchange that audit partners be rotated every five years.  Singapore's Corporate Governance Code issued in April last year recommends that all audit committee members be non-executive directors and that a majority, including the chairman of the audit committee, be independent.  MAS will make this a mandatory requirement for all banks incorporated in Singapore.

28   As part of this ongoing effort to enhance the independence and effectiveness of external auditors, MAS will require banks incorporated in Singapore to change their audit firms every five years.  Banks which currently have appointed an audit firm that has been auditing them for more than five consecutive years should effect a change in auditor as soon as practicable and no later than 2006.  MAS urges the banks' boards of directors to act sooner rather than later to ensure an orderly process of rotation. 

29   This new requirement is an extension of the earlier requirement for mandatory rotation of audit partners, and will further enhance the independence and effectiveness of external auditors.  First, mandatory audit firm rotation will help prevent audit firms from having an excessive focus on maintaining long-term commercial relationships with the banks they audit.  Such long-term relationships could, in reality or be perceived to, make the audit firm too committed or beholden to the bank, thereby undermining its independence, compromising its objectivity, and reducing its effectiveness.

30   Second, it will help maintain the requisite scepticism that all good auditors apply in their work, to verify rather than accept things at face value.  With an extended relationship, auditor firms run the risk of getting too close to the management of the banks they audit, and begin to identify too closely with the banks' practices and culture.  Third, even if an audit firm with a long-term relationship maintains its objectivity and scepticism, its ability to maintain a sharp eye for control weaknesses could diminish over time.  The audit process could become an uncritical routine repeat of earlier engagements, thereby reducing the auditor's alertness to subtle but important changes in the bank's circumstances.  To quote Arthur Levitt, the former Chairman of the US SEC, mandatory audit firm rotation would help to ensure that "fresh and sceptical eyes are always looking at the numbers."

31   MAS recognises that frequent rotation of auditors is expensive and time-consuming. We also recognise that auditors take time to gain familiarity with a bank and that some degree of continuity strengthens the audit.  We need to balance the desire to provide continuity and contain costs with the need to enhance audit independence and bring fresh perspectives to the audit process.  MAS has consulted the banks and decided that a five-year rotation period provides the appropriate balance.

32   Is MAS confident that this move will ensure auditor effectiveness?  Or for that matter, will all the other measures we have put in place with regards to board independence and public disclosure ensure good corporate governance?  None of these measures is foolproof; none can guarantee against failure.  Far more important than the form and structures for board composition and audit functions is the substance of effective governance:  the diligence of oversight, the quality of discussion, the rigour of analysis.  Whether it is board directors or external auditors, it is their skills, knowledge, and judgement that matter at the end of the day.  And most of all, their integrity.


33   The fifth and last "C" is collaboration.  This can occur at two levels: among industry players, and between industry players and the regulator.  Customer demands for integrated and seamless services, coupled with the imperative to achieve economies of scale in activities that require a large critical mass, sometimes present competing players with interesting possibilities for synergistic collaboration.  The payment infrastructure provides a good example of this, and I am pleased to announce such a collaborative effort in Singapore.  The two key payment operators in Singapore - BCS Information Systems Pte Ltd (BCSIS) and NETS have decided to jointly develop Singapore's first online, bank-neutral direct debit platform that will enable consumers in Singapore to pay for their purchases over the Internet.  Facilitated by MAS and the Infocomm Development Authority of Singapore (IDA), this collaboration will allow merchants to link to the payment switches of either BCSIS or NETS to reach the customers of any of the participating banks connected to these payment switches.  This interconnection will result in a common e-payment platform in Singapore that will serve as the basis for offering new and innovative payment services.  BCSIS and NETS will be signing a Memorandum of Understanding during the tea-break later to seal their strategic intent.

34   The second dimension of collaboration is that between the regulator and the industry.  Industry consultation has been a key factor in the financial reforms that MAS has undertaken over the last four years.  We consulted widely on the amendments to the Banking Act before tabling it to Parliament last year.  We sought feedback from the banking industry, the accounting and auditing profession, and even legal practitioners.  In the case of the Securities and Futures Act and Financial Advisors Act, we have undertaken open public consultation.  Consultation has helped MAS to tap industry expertise and experience on new products and business models, better understand the impact of new regulations on competitiveness and compliance costs, and identify the operational and implementation issues that industry may face.  Industry feedback has helped to minimise unintended consequences arising from new policies and regulations and ensure that they are relevant, practical and robust.  MAS will continue to enhance the role of industry consultation as an integral part of its policy-making process.

35   The new financial landscape has unleashed exciting opportunities for Singapore's growth as a financial centre. But it also poses uncertain implications for risk management and financial stability.  The challenge for both the industry and MAS is to work together to maintain confidence and stability while promoting innovation and enterprise.  If we do this well, we will achieve our vision of building a resilient, competitive, and dynamic financial centre.

1 Bank for International Settlements (2001), Consolidation in the Financial Sector, G10 Study.

2 KPMG (2000), World Class Transactions: Insights into Creating Shareholder Value thorugh Mergers & Acquisitions.

3 McKinsey (Jun 2000), Investor Opinion Survey.

4 Credit Lyonnais Securities Emerging Markets Report Oct 2000 evaluated the corporate governance practices and performance of 115 large cap stocks in emerging markets, and found that those companies with higher than average corporate governance practices weathered the economics crisis better than those with inferior practices.