Sunday, October 26, 2008

Singapore Government guarantees bank deposits

The Singapore Government has guaranteed all bank deposits in Singapore. I think that this is a bad idea. It is putting taxpayers at risk, without any appropriate return.

Here is a possible risk. A foreign bank receives $1 billion of deposits in Singapore. The bank engages in risky trading and lost $1 billion. After deducting its capital, the remaining loss has to be borne by the Singapore Government, actually the taxpayers of Singapore.

The Monetary Authority of Singapore may have ways of monitoring this risk and preventing it. But, can MAS look after the detailed operations of all the banks in Singapore? Do they have the resources and expertise?

Suppose the Singapore Government does not give this guarantee. Some of the money in Singapore will flow to Hong Kong or Malaysia. To keep the money in Singapore, the banks have to offer higher interest rate, maybe 3%, 4% or 5%. This will allow the deposit rate to increase to the market rate, and give the public a better interest rate on their savings. This is a good idea.

If there is a real need to guarantee the deposits, perhaps it should be up to 50% instead of the total sum. Maybe, the bank should pay some guarantee fee to the Singapore Government.

I hope to raise this point to the Singapore Government at an appropriate time, if my views are confirmed to be sensible. I look forward to receive the views of knowledgeable people on this matter.


Anonymous said...

I agree with your argument.In the first place,why should tax-payers bear the brunts of the banking industries?These peoples are getting good remunerations and good perks and yet still fail to deliver...They should pay a price when the economy is good by returning part of their earnings back to the society and NOT expect the society to bill them out.
We hope that the government do more for the citizen.

a retiree

Anonymous said...

Do you think the MAS chairman is does not know what you know? How can he be travelling to India and China and advising them how to be financial hubs if he does not know what is good for Singapore? Good for Singapore does not necessarily mean good for you, you know?

Everlearning said...

If banks think of staying on in business for a long time, they won't resort into doing this.

Truly, it is so unbelievable that they will take advantage of the Singapore Government.

Don't worry, our authorities are graduates with high degrees, masters or PhD and they would clamp down on these high-flyers in the banks.

Faircomment said...

I don't claim to be financially more "knowledgeable" than you. But I certainly agree with what you say and hope that you can convince our govt to be a little less pro-business and a little more pro-people.

The decision to fully guarantee bank deposits was not intended to protect the life savings of our old and vulnerable but to protect the banks from draw-downs. Your alternative suggestion to let higher interest rates curb the outflow of bank funds is not only pro-people, but it achieves the same objective. Why our $m men cannot think like you do?

In the past, many Ministers spoke of the need to "regulate with a light touch". Look what regulation, or the lack of it, has done to the US and world financial market. Even Alan Greenspan now admit that the principle of leaving the market to regulate itself has failed. What must it take for our Ministers to finally see the light?

Anonymous said...

Although I am just a layman, I agree with your sugeestion that increase interest rates to curb the outflow is a good idea.

Anonymous said...

My confidence is lower. If MAS can not forsee the minibond blowup, I have less confident that they can see a big one comimg.

Wealth Journey said...

In ordinary times, it is correct to say that guaranteed of all bank deposits is not a good policy. However, in extraordinary times, to instil confidence and preventing bank runs, this is a prudent policy. In this case, the pros of preventing a confidence crisis and bankruns will outweigh the risks of banks engaging in risky operations.

To raise interest rate to keep the money in singapore means that the corresponding loan rates will rise. This is not good for mortgages, car loans, business loans and it will indirectly increase cost for everyone (citizens and businesses).

To guaranteed anything less than your counterparts will mean that people will still moved their money as it can be perceived that there might be a lack of confidence by the govt of the nation's banks. In normal times, this will not happen, but again, in times of confidence crisis, it will create a feedback loop that will exaberate things. Perception of lack of confidence in bank -> some people withdraw money because of better guarantees elsewhere -> banks have less money to maintain their Tier1 & 2 capital ratio -> other people hear abt what others are doing -> other people starts withdrawing -> bank have less money -> the loop continues and you will have your bankruns. (You can see the bank runs in US).

Anonymous said...

If the government does not guarantee all the deposits, the local/foreign banks will be on bank run. Deposits rates will increase (and correspondingly, so does the loan rates)

Are you sure you want to finance your housing loans and HDB loans at 10% per annum?

Governments around the world are all guaranteeing deposits not only to prevent bank runs, but also to regain confidence in the markets. There are a lot of factors and considerations taken to that matter.

MAS will not allow any bank to fall so easily because we are aiming to be a financial hub of asia. It would be not feasible to not guarantee all the deposits when other prominent financial hubs are doing so. Should the economy recover, banks/companies will not prefer to come to singapore either.

Tan Kin Lian said...

Hi 5:12 PM

I don't think that mortgage interest rate will go up to 10%. I see the spread between the lending and borrowing rate decrease.

Interest rate has to keep pace with inflation and have a real return.

For too long, the interest rate is Singapore has been below inflation rate. This is unfair to the retirees and the savers. How can they earn enough to meet their living expenses?

If interest rate on mortgage loan is higher, then people should not pay too much for their property. This will prevent the bubble in property prices (like what has happened in USA).

Artificially low interest rate is bad.

Anonymous said...

i am for the deposit gte. it is win-win for everyone.

win for savers - at least everyone can sleep soundly knowing govt will gte more than the original 20K under the previous system. i rather forego a bit of interest and prefer my monies to be SUPER SAFE rather than earn a higher rate and having to worry whether the money is still there tomorrow. In other words, the gte actually suits the needs of retirees and conversative savers.

win for banks/singapore - no outflow of funds to other countries, no bank runs due to loss of confidence. with outflow, there is pressure on S$ and it will result in inflationary pressures again. This is not a good way to force banks to increase I/R.

I am a net saver. I would also like I/R to be high and I totally agree that I/R has thus far been too low for retirees and savers. Cheap loans is one of the reasons for the large run up in property prices in recent years. in other words, internal inflation.

What is needed i think is for the govt to follow the practices of other countries and use I/R as a policy tool to curb inflation. There ought to be a minimum base rate for I/R such as 2% p.a. for all savings. Of course depending on economic situation, this rate can be adjusted. Currently the problem is that govt leave this rate setting entirely to the market...greenspan mentioned that leaving everything to the demand and supply of the market has its problems. i think this is one of them.

Koh Siew Yong (Mr)

Anonymous said...

If the purpose is to prevent a bank run, we shd only guarantee spore banks and Fin. companies.
Why shd foreign banks be taken for a ride?
Sorry, this is just my personal, unprofessional view. Correct me if I ma wrong.

Anonymous said...

I feel that having deposit rate increase to 3-5% is a good thing for retirees and savers. In fact, if it wasn't for the persistent low interest-rate environment for the past years, we would probably not be facing this problem of mass mis-sellng of toxic structure products.


Anonymous said...

To anonymous @6.03pm above - Because Singaporeans have deposits in these foreign banks as well.

Anonymous said...

If one just think a bit harder. One will understand why foreign entities are also gtd. Imagine only the 3 local banks are gtd..what will happen? Overnight there will be long qs at all the other foreign banks to withdraw monies and put in local banks cos its safer. effectively you have created bank runs on foreign banks and instead of instilling confidence, the whole financial system is on the verge of collapsing.

Koh Siew Yong

Anonymous said...

low interest rate in local banks can explain the reason why people holds stocks(minibond)instead.
As it ensure a real return on their saving or simply to preserve their value of saving.

so allowing the interest rate to rise will be a good

Anonymous said...

Kin Lian's argument that Govt should not use taxpayers money to guarantee banks' seems to be somewhat extreme and skewed for the simple reason that practically speaking every taxpayer is also a fixed deposit investor some of the time if not all the time. So such a person should not feel so sad that his taxed income is used to bail others out, that "others" could well be himself some day when he is the unfortunate victim of a bank collapse.
Like blood donation, you could use your own blood some day too.
Interest rate increases also is a double edged sword as pointed out by one of the other persons on this thread.


freeier said...

In operation of a bank, there is something called a capital reserve.
For every 10million of deposit taken (i.e. hence 10million of loan loanable), the bank has to keep around 9~12% of the money in treasury bill or some other MAS account as capital reserves. Hence the chance of a bank taking excessive risk in Singapore is much lower.

We can never rule out rogue traders like Lee Nickson, but I do have confident that banks in Singapore have sufficient safeguard to ensure such risk taking issues not happening.

Do note also that the deposit guarantee is likely to only include the licensed banks in Singapore, i.e. the FQB (fully qualified banks). Those would have had huge capital investment in singapore (system, real estate, human resources) making this kind of gambling very unlikely. Remember, these systems/assets do not form the reserves, the reserves are strictly cash/cash equivalent.

Anonymous said...

I agree with faircomment that a guarantee is needed at this time of exceptional uncertainty just to keep the system in order. After all it is for only 2 years. This singapore fd rates have been very low many years already so why complain now and because of the low interbank rates that house owners can afford to take mortgage loans. In fact all the FIs should pay a reasonable fee for guarantee because this is to protect their business. Don't worry about the retirees. This recession is go to do them a favour. You will see gradually that most of the things will become much cheaper during a recession, so inflation will subside. After all retirees do not have income or very little income. So a low inflation environment will be much better than a slightly higher fd interest rate. Agree, Mr. Tan?

Anonymous said...

Hi 6.03pm
I would think that if we just guarantee deposits in spore banks, it would run counter to fair competition between banks locally.

I am guessing what the gov is doing is also to level the playing ground in banking with international standard.

Anonymous said...

LOL... If you guarantee only Singapore Banks and Singaporean Financial Companies. All the funds will follow to these Singaporean companies, and the rest of the banks will suffer a bank run. Wouldn't it be a high panic situation then?

Foreign banks too hold a high amount of deposits (both retail and corporate) If Singapore just protect local companies, they wouldn't dare to set up shop here anymore.

Anonymous said...

You are my Singapore's Man of the Year now, you ask for views you get it. (1) There is a catch, Singapore only guarantee up to 150 billion of our reserves on deposits, but our deposit base should be way larger than 150 bln. I do not have the figures at hand, you might want to refer to MAS publications on our actual deposit base. (2) You are right to say funds will flow to other countries if there was no guarantee. That in my opinion was the reason why they responded after HK's announcement. If we do not give guarantees, SGD will be pressured to depreciate and the actual interest rates offered by local banks have to be significantly higher than market rates to make up the difference. At a time when the rest of the world are cutting rates, this is not feasible. Credit facilities will be tightened, economic activities will shrink and mortgage holders will default. Rising interest rates was part of the reason for the collapse of the property market in US, and in Singapore our banks do have exposure to the property market. Normally MAS executes monetary policy via controlling the money supply but refrain from manipulating the interest rates because our economy is small and open and volatility from huge movement of funds in and out of the country is not healthy to business operations. Also, on your reply above, when comparing inflation rate and interest rates, we have to take into account of the appreciation/depreciation of SGD. Still I think our currency could have been stronger, but we are still relying alot on the old fashioned cheap export model. Good work man, cheers.

Anonymous said...

If the foreign FIs are more willing to take risks and raise their interest rates, then would there be a "bank run" from local FIs to foreign FIs?
Is it fair to local FIs and to local tax payers who hv to pay to gte these FDs?

Anonymous said...

i think the entire issue is more of the choice of the less of 2 Evils, maybe even 3 or 4 Evils..

think about it, really

Concerned said...


A lot of banks here have deposits from wealthy foreigners like Indonesians, Thais, etc. Should a bank failed, then taxpayers' money will be used to pay off these foreigners. Do you think it is fair to Singaporeans? The full guarantee should only be limited to Singaporeans and not foreigners.

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