Published Date: 19 September 2005 Monetary Authority of Singapore 

Second Reading Speech by Mr Tharman Shanmugaratnam, Minister for Education and Deputy Chairman, Monetary Authority of Singapore 

Mr Speaker Sir, on behalf of the Senior Minister, I beg to move that the Bill be now read a second time.

2   Sir, this Bill seeks to establish a deposit insurance scheme in Singapore. Once enacted, it will provide an explicit, limited guarantee to insured depositors that they will be compensated, up to a specified amount, in the event of a failure of a full bank or a finance company in Singapore.

3   Sir, the deposit insurance scheme has been three years in the making, from the time MAS announced its intentions in June 2002.  MAS has consulted the industry and the public on the key features of the deposit insurance scheme and has received broad support for the scheme.  We have considered and incorporated the comments received, where appropriate, in the course of finalizing the features of the deposit insurance scheme.  MAS will also be holding consultations on the specific regulations required to implement the deposit insurance scheme envisaged in the Bill. The deposit insurance scheme is expected to come into effect on 1 April 2006.

WHY WE NEED DEPOSIT INSURANCE IN A DYNAMIC AND SOUND FINANCIAL SYSTEM

4   Sir, let me first set out the thinking behind the introduction of a deposit insurance scheme in Singapore.

5   MAS began a process of liberalizing and opening up the domestic banking sector in 1999 to foster a more dynamic and innovative financial centre, and to strengthen the local banks by injecting more competition in the system.  At the same time, MAS has shifted away from one-size-fits-all regulation of financial institutions, towards a risk- focused supervisory approach that is tailored to the institution in question - basically, tailored to its scale, its business activities, the impact that problems in the institution will have on the financial system as a whole, and MAS' assessment of the strength of the firm and its management.  MAS' aim in opening the market to competition, and in shifting towards risk-focused supervision, was to foster a banking system that is not only strong, but innovative and able to take well-managed risks.

6   The domestic banking market is now highly competitive. There is a greater presence of strong foreign banks, including 6 banks which have been awarded Qualifying Full Bank (QFB) privileges. Increased competition has resulted in lower prices for customers and a wider range of services and products.  The 7 local banks in 1998 have consolidated into the 3 local banking groups that we have today.  The scale and complexity of their operations have also increased.  They have expanded their fee-earning business activities and their presence abroad so as to grow and diversify their revenue base. They have also upgraded their risk management capabilities, and are managing their capital more efficiently.

7   Five years into a more liberalized banking sector, the local banks are more dynamic and are expanding abroad, but remain strong. They have responded well to competition, and have held their own.

8   While our banking system remains sound, the growing complexity and scope of banking businesses will present challenges to supervision, in all financial centres. Increasingly, the operations of banks with a global and regional presence are influenced by factors beyond the control of the supervisor in any one market. While MAS' licensing, regulatory and supervisory standards will aim to ensure the safety and soundness of the banking system in Singapore, international experience has shown that the possibility of a bank failure and loss to depositors cannot be eliminated even in reputable and well supervised jurisdictions.  Further, we should not seek to eliminate all risks of failure, even if it was possible to do so. It would call for onerous rules that would stifle enterprise and ultimately weaken our banks.  In seeking to promote and preserve stability in the financial system, we therefore cannot and should not introduce rules to guarantee the soundness of individual financial institutions.

9   Market discipline plays an important part in keeping the financial system safe and sound. MAS has embarked on initiatives to empower consumers through financial education and by enhancing the efficiency of dispute resolution mechanisms for retail consumers.

10   MAS recognises that small depositors will often not be in a position to assess the safety and soundness of banks. But the solution to this should not be for Government to guarantee their deposits - even implicitly if not explicitly. All experience internationally shows that the effectiveness of market discipline is blunted if depositors simply look to Government for a guarantee of their deposits. It leads to moral hazard and excessive risk-taking - amongst depositors, who will place their money where the returns are highest regardless of the risks, as well as amongst the banks themselves.

11   In Singapore, the Government or MAS has not issued any guarantee for bank deposits. However, the absence of an explicit limited deposit insurance scheme could lead depositors to assume that the Government would guarantee their deposits should a bank fail.

12   A deposit insurance scheme is for these reasons a useful plank in a dynamic and competitive financial system. It will complement the role of boards of directors and management of banks, and MAS supervision, which seek to ensure that banks manage their risks prudently as they grow and become more complex in their operations.

13   Deposit insurance will serve two purposes. First, it will provide an adequate layer of protection for small depositors.  Second, a deposit insurance scheme will clarify explicitly the extent of protection given to depositors and dispel any misperception that there is an implicit government guarantee on deposits.

14   Explicit deposit insurance schemes are present in about 80 countries worldwide.  It is timely to introduce a deposit insurance scheme in Singapore now when the banking system is sound. It is better to build up a Deposit Insurance Fund slowly when the banking system is healthy, than to tax the banking sector heavily when a failure has occurred. 

15   Mr Speaker Sir, I will now go through the key provisions of the Bill.

KEY MEASURES UNDER THE DEPOSIT INSURANCE BILL

Coverage of Deposit Insurance

16   The level and extent of coverage is a key feature of any deposit insurance scheme. In making this decision, MAS was guided by both the need to provide adequate protection for small depositors, as well as the need to limit costs and preserve market discipline.  The higher and broader the coverage, the higher the cost will be to banks.  This would normally result in banks passing on higher costs to depositors, and will impair the competitiveness of banks in Singapore.  Overly-generous coverage under the deposit insurance scheme could also lead to moral hazard, where large depositors and the banks themselves take on excessive risk.

17   The Bill therefore seeks to provide adequate protection to small depositors, who are least able to make informed decisions, while containing the costs of deposit insurance and preserving the incentives for large depositors to exercise market discipline. The deposit insurance scheme is meant for small depositors, not for large or sophisticated depositors. 

18   We have decided on a $20,000 coverage limit, per depositor per institution, net of liabilities to the failed institution

.  This means that a depositor would receive compensation under the deposit insurance scheme for the first $20,000 of his aggregate insured deposits in his  bank or finance company, if it should fail. MAS' study shows that this level of coverage would protect in full the deposits of about 87% of individual depositors.

19   The scheme will only cover deposits held by individuals.  Deposits of businesses (including sole proprietorships and partnerships) will not be insured.  In view of public interest, the scheme will also cover registered and exempt charities.

20   The next question is the type of deposits to be protected. The deposit insurance scheme will insure Singapore dollar deposits in standard savings, current and fixed deposit accounts in all full banks and finance companies. This will cover a range of such deposits, including for instance, Islamic deposits that are principal-guaranteed, but will exclude products which are investment-oriented. Investment products, foreign currency products, structured deposits and deposits placed as collateral will not be insured.

21   The coverage limit will be on a per depositor per institution basis. This means that balances in all standard savings, current and fixed deposit accounts belonging to the same depositor, whether in his own name, held jointly with another person, or in a trust account where he is the beneficiary, will be aggregated to compute the compensation amount. However, we have given special consideration to CPF savings placed in such types of bank deposits, given the important social role of CPF funds as core retirement savings. Moneys held in bank deposits under the CPF Investment Scheme will be separately insured up to $20,000.

22   Coverage on a per depositor basis, under which a person's  deposit accounts in a bank are added together, is  equitable. It is preferred to coverage for each deposit account, which could lead to large depositors splitting their deposits in several deposit accounts to take advantage of a higher level of coverage. 

23   By introducing deposit insurance coverage in a targeted manner, the size of the Deposit Insurance Fund, and consequently the premiums levied on banks, can be kept affordable.

Deposit Insurance Fund

24   Clause 9 establishes a deposit insurance fund that will be built up from premium contributions of the banks and finance companies who are Scheme members. The fund will pay compensation to insured depositors in the event of a failure of a Scheme member.

25   Some countries levy contributions on Scheme members only after a bank failure, ie ex-post, to make the payouts required to depositors. We considered this carefully.  We have decided to levy premium contributions in advance, ex-ante, even when there are no bank failures, to build up a deposit insurance fund.  There are several advantages to ex-ante funding. Firstly, it ensures a readily available pool of funds to enable prompt disbursement should compensation need to be made.  Secondly, it is fairer to collect premiums before a bank failure than after a bank failure, as the failed Scheme member would also have contributed to the fund.  Ex-ante funding also mitigates the pro-cyclical effect that large ex-post contributions may have on the banking sector - in other words, it does not impose hefty costs on banks at times of difficulty, which could lead to economic contraction. Finally, collecting premiums to build up a ready fund reinforces public confidence in the deposit insurance scheme, and dispels any expectation of a government guarantee on deposits.  

26   The targeted fund size, to be built up over 10 -11 years from premium contributions, is equivalent to 0.3% of total insured deposits in the banking system, estimated currently at about $120 million.

MAS' analysis has found that this would be an adequate fund size given the key features of the deposit insurance scheme such as the scope of coverage, the priority claim for insured deposits, the fact that we do not face a high risk of bank failure in Singapore, and the good likelihood of recovering sufficient assets from the failed bank to meet its insured deposit liabilities.  The Deposit Insurance Agency would also be able to borrow to fund any temporary shortfalls, and to impose additional premiums on banks should it be necessary to recapitalise the fund.

27   Foreign full banks which operate as branches here will be required to maintain a minimum level of Singapore-domiciled assets of at least 100% of their insured deposits.

28   In the event of a bank failure, the Deposit Insurance Agency will make compensation payout to insured depositors from the Deposit Insurance Fund.  It will then stand in the shoes of the insured depositors to claim against the assets of the failed bank for the amount of compensation that has been paid out. The Bill will give also insured deposits priority over other deposit liabilities of the bank [Clauses 65-66]. These measures - asset maintenance and insured deposit priority - will strengthen recovery by the Deposit Insurance Agency from the failed institution of the amount it has paid out as compensation. They serve to lower the necessary size of the Deposit Insurance Fund and hence the cost of deposit insurance.

29   [Clause 11 specifies the permissible investments for the Deposit Insurance Fund.]  The Fund will be invested in safe and liquid assets such as Singapore Government Securities, deposits with MAS and other assets approved by the Minister.

Premiums

30   Next, the question of premiums to be paid by different institutions. Full banks and finance companies will be required to contribute premiums in order to build up the Deposit Insurance Fund. But charging a flat rate to all institutions regardless of risk will be inequitable, and dulls the incentive for institutions to improve their risk management. Premium contributions will therefore be based on the risk profiles of Scheme members, so that less risky and better-managed Scheme members will be charged lower premiums. Initially, premiums charged will be set at an average of 0.03% of insured deposits (to be set out in Regulations), which are among the lowest in the world.

Compensation

31   The Bill sets out the procedures for triggering a payout from the Deposit Insurance Fund.  It provides MAS with the powers to determine that a payout be made to insured depositors from the deposit insurance fund if a court order has been made to wind up the Scheme member or if MAS is of the opinion that a Scheme member is insolvent, unable or likely to become unable to meet its obligations, or is about to suspend payment. 

32   If depositor payout is triggered, the Deposit Insurance Agency will make an official announcement. Depositors need not file claims with the Deposit Insurance Agency as payouts will be computed based on the bank's records. The Deposit Insurance Agency will make arrangements to pay out compensation to eligible depositors.

33   As I stated earlier, eligible depositors will be insured up to a maximum of $20,000 in a bank. If the deposit insurance payout received is less than the depositor's total amount of deposits in the bank, the depositor may file a separate claim with the liquidator of the failed bank for the difference between the amount of his deposits in the bank and the deposit insurance payout. 

Deposit Insurance Agency

34   A Deposit Insurance Agency, separate from MAS, will be established to administer the deposit insurance scheme and manage the Deposit Insurance Fund. The Deposit Insurance Agency will also conduct public education on the deposit insurance scheme.

35   The Deposit Insurance Agency will be incorporated as a company limited by guarantee under the Companies Act. The board of directors of the Deposit Insurance Agency will be accountable to the Minister in charge of MAS for its acts and decisions. 

36   The budget of the Deposit Insurance Agency will be approved by the Minister. The Bill also includes provisions for the Deposit Insurance Agency and Fund to be audited, and for a copy of the audited financial statements, auditor's report and annual report to be provided to the Minister.

. The Deposit Insurance Agency's financial statements and annual report will also be made available to the public.

CONCLUSION

37   Sir, a deposit insurance scheme in Singapore will strengthen depositor protection as our financial sector continues to grow in dynamism and complexity. The existence of an explicit, limited deposit insurance scheme will also dispel public misconception of a government guarantee of deposits. It will preserve incentives for market discipline, which is essential for a safe and sound financial system. The key features of the deposit insurance scheme that I have highlighted have been carefully designed so as to achieve these objectives, while limiting costs and maintaining the competitiveness of our banks.

38   Sir, I beg to move.