26 October, 2008
Make Government Bonds easily available to the public
The Singapore Government has decided to guarantee all deposits with banks in Singapore. This move is intended to maintain the depositors' confidence in Singapore banks and to prevent the flight of deposits to financial jurisdiction covered by a state guarantee.
I wonder why Singapore taxpayers should be bearing the cost of this guarantee? The Singapore banks now offer a low interest rate of less than 1% per annum and earn a high spread on the loans that they make out. They are able to lend out the money on loans and overdrafts at the prime rate of 4% plus a margin. Are the taxpayers subsidising the shareholders of these banks?
I like to suggest an alternative approach. The Singapore Government should issue more government bonds for durations of 1 to 30 years. This should be made easily available to the public to buy through ATMs or other channels. The money collected from these bonds can be lent out to the financial institutions based on the cost of funds plus a credit spread, for the financial institutions to make loans and overdraft.
This approach will allow the working people and retirees in Singapore to earn a market rate of interest on the government bonds, which is higher than interest paid on bank deposits. This higher interest rate will help to cushion the temporary high inflation rate in Singapore.
The banks should not be allowed to earn a high margin on their lending operations and benefit from the guarantee provided by the Government. The high margin increases the profits of the banks and benefits their shareholders, but comes at the expense of the deposits who are given a low interest rate.
Tan Kin Lian
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