The Banker magazine interview with Deputy Prime Minister & MAS Chairman Lee Hsien Loong Date : 10 Apr 2003

The Banker asks Singapore's deputy prime minister and finance minister Lee Hsien Loong about banking sector reform, capital raising and foreign competition

Q Singapore started out reforming its financial centre even before the Asian financial crisis. This move now seems to have been very far-sighted?

A If we had known what was going to happen we would have started even earlier. But it was just in time. We made a lot of changes. It put us in a stronger position although, unfortunately, it hasn't delivered a lot of growth yet. To get growth, you need the whole industry to be expanding. But what we have done will enable us to pick up once the region recovers.

Q What role should Singapore's financial centre play in the economy?

A One is that you must have a sound financial system in order for the rest of the economy to work, but for us it's also been a growth sector. For a long period of time until 1997,it was growing in double digits, much faster than the rest of the economy. Since then, it's been slow, about 2% growth per year on average, but I think we have the preconditions to make this the pre-eminent financial centre in Asia. The rules are there, the system is there, the confidence is there and as the region grows we will grow with it.

Q Singapore has deliberately moved from regulation to disclosure-based supervision and a more caveat emptor approach. Why?

A Regulation was reaching its limits. When matters were simpler, players were fewer, things were slower moving, the markets were more national and less globalised, we could work on the basis of regulation. Regulations were approved and then enforced stringently to keep the financial sector away from dangerous cliffs and obstacles. But in a fast moving situation you cannot do that. No regulator knows enough to do that, and if you attempt it either you will stifle the industry or more likely you will fail somewhere or other problems will arise.

Q How has your approach to bank supervision changed?

A We now have a much more active supervision schedule for the banks. Previously we didn't inspect them on a frequent basis. Now we have a schedule and hope to inspect them every two years and definitely every three years. In between, if things crop up, we might go in and do a more focussed inspection.

This approach means we have to be prepared to allow freer play. We have to let the banks proceed and if they come with a proposition, unless we have a strong reason to veto it, we let them go ahead. They have shareholders to answer to and must decide what's best for them. Whether it's a merger, or a new product or a pricing policy, we should not intervene except in extremis. In extremis means if the stability of the whole financial system could be affected.

Q Has the advent of Enron, Worldcom and other crises made you question whether you should place so much faith in the financial sector?

A It's true that people now have less faith than they did that the invisible hand will always produce good results, or that people put into positions of responsibility will always have their fiduciary duties at the forefront of their minds. But I think the direction in which Singapore is going in is the right one. We were at one extreme, we have moved towards the middle, we didn't go all the way to the far end. What we have changed is what needed to be changed. In America although the pendulum is swinging back, it will not go back to the restrictions of the Glass Steagall days of the 1920s.

Nowadays, when presented with new and ingenious schemes by investment bankers, my first reaction is often to ask whether it may be too clever to be sound.  And then I must check myself and say "hold on, may be there is a point to it". You must not get into a mood where you start off prematurely jaundiced. You have to be sceptical but at the same time keep an open mind.

Q What type of things have you said "no" to?

A There have been cases where bankers have come and said: "This is a very efficient capital structure, if we do things in this way we meet all your requirements, can you please sign off on it?" We have looked at the structure and whether it meets the letter of the law is arguable but it's certainly not what we intended and we let them know that.

Q In the old days, there was strictly no internationalisation of the Singapore dollar? How has this policy changed?

A We still maintain that but you can borrow in Singapore dollars if it's not for use overseas and not for speculation. If you want to use it overseas you have to swap or convert the Singapore dollar proceeds into foreign currency. But you can borrow in order to buy shares or property in Singapore. We recognise that a certain amount of free play is necessary. If we hadn't done that, we would not have been able to get the bond market moving at all.

Q How attractive is Singapore now as a centre for capital raising?

A We have had quite a lot of the major players who come here to raise money [African Development Bank, General Electric]. The constraint is that we are a small market, and the flows don't necessarily match. We would like people to borrow and swap out to use overseas but then you need to have people who want to receive Singapore dollars and provide the foreign exchange. That's not always available, which translates into big spreads.

The other constraint is that we hoped the countries and companies in the region would want to raise less from bank loans and more from the markets, and that they would raise this offshore and some of it in Singapore. So far, this has not happened on a large scale. They are raising some on their domestic markets and some in US dollars but very often in London or New York.

Q Is the lack of free float on the Singapore Stock Exchange a limiting factor in your growth plans?

A We are quite a small stock market, about 0.5% of global capitalisation, and that puts a constraint on our liquidity. Ideally, you should have a pooling of funds in Asia and a stock market to serve more than one country, as is beginning to happen in Europe. Then there would be more funds and more liquidity but that will be a long time in coming.

Q How has opening up the banking sector to foreign competition impacted on Singapore?

A It's changed the landscape. We started off with seven banks in 1997 including the POSBank

. We are now down to three after the consolidation.  The rules governing foreign participation have been eased and we now have six qualified foreign banks. It's a much more competitive market.

Margins have shrunk, service has improved, charges haven't always gone down, but it was the right thing for us to do. If we had not opened up, we would not have had the consolidation and rationalisation.

Q Singapore banks are burdened with higher capital adequacy requirements than foreign banks. Will this change?

A It's something we have to study. We have adjusted our requirements over time. It used to be 12% tier one capital, now it's 8% tier one plus 4% tier two and we allow hybrid instruments as well. It's tighter than the standard Bank of International Settlements requirements and the banks have made representations to us about it. We shall consider the matter.