Tan Kin Lian looks at possible risks to S'poreans.


Should the Government guarantee bank deposits?

Last updated on October 30th, 2008 at 09:06 pm

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Tan Kin Lian / Columnist

The Singapore Government has guaranteed all bank deposits in Singapore. I do not know the details of the guarantee and if any fee is being paid by the banks for this guarantee. This guarantee places the Singapore taxpayers at risk and deserves an appropriate return.

Possible risk

Here is a possible risk. A foreign bank receives $1 billion of deposits in Singapore from foreign depositors. The bank engages in risky trading and lose $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?

Higher interest rate

If the Singapore Government does not give this guarantee, some of the deposits in Singapore will flow to Hong Kong, Malaysia or other jurisdictions. 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 will be good news for Singaporeans.

Interest rate has been too low in Singapore for too long. This is due to excessive foreign funds being parked here. It depresses the interest rate and is used to inflate prices of property and other assets. The outflow of these funds may be better for the economy in getting the interest rate to a higher level and avoiding asset bubbles.

New Zealand

A friend sent me details of the guarantee scheme operated by the New Zealand Government. It covers deposits and debt securities issued by banks and other deposit taking entities.

Institutions with total retail deposits above $5 billion have to pay a fee of 10 basis points per annum in excess of this threshold. This means that a bank with $20 billion in retail deposits would pay $15 million in fees per annum. The institution has to pay a higher charge for growth in deposits from a certain date. This charge is 10 to 300 basis points depending on the credit rating of the institutions.

There is a coverage cap of $1 million per depositor per covered institution. Separate rules apply to the debt securities issued by these institutions.

I hope that the experience of New Zealand or other jurisdiction can be used to fine tune the guarantee that is offered to Singapore banks.

Oppose the Guarantee

Here are the views of some people who oppose the guarantee provided to the banks.

Why should tax-payers bear the brunt of the failures of the banking industry? The bankers are getting good remunerations and good perks and yet still fail to deliver. They should return part of their earnings to society and NOT expect the society to bail them out.

I hope that you can convince our government 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.

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

If MAS is not able to foresee the mini-bond crisis, I have less confident that they can manage this risk.

I like the interest rate to be high. I totally agree that interest rate has been far too low for retirees and savers. Cheap loans have led to large increase in property prices. The Government should follow the practices of other countries and use interest rate as a policy tool to curb inflation. There ought to be a minimum interest rate of 2% p.a. for all savings.

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 persistently low interest-rate environment for the past years, we would probably not be facing this problem of mass mis-sellng of toxic structure products.

A lot of banks here have deposits from wealthy foreigners. 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.

Support the Guarantee

Here are the views in support of the guarantee:

It is unbelievable that the banks will take advantage of the Singapore Government. If banks think of staying on in business for a long time, they will not resort to doing this. I am confident that the authority can clam down on the high flyers in the banks.

In ordinary times, it is correct to say that guarantee of all bank deposits is not a good policy. However, in extraordinary times, to instil confidence and prevent bank runs, this is a prudent policy.

To raise interest rate 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 citizens and businesses.

Conclusion

You be the judge. Should Singapore provide guarantees for bank deposits?

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This entry was posted in Uncategorised.
This entry was posted in Uncategorised.