Chapter 2. Emergence of Singapore as a Full-bodied Financial and Banking
2.2 Liberalization of Singapore’s Financial and Banking Market: Singapore’s
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International Monetary Exchange Limited (Simex), lost more than 45% (Tan, 1999).
This resulted in severe losses on the side of private investors.
Singapore's brokerage firms were also severely shaken by a unilateral decision taken by the Malaysian government enforcing tight exchange control. The Kuala Lumpur Stock Exchange in mid-1998 was also concerned by protectionist measures, thus all transactions involving shares of Malaysian companies were no longer allowed to be conducted outside of Malaysia. As a consequence Central Limit Order Book International, which so far in Singapore was in charge of such transactions suffered dramatic losses (Jin, 2000).
2.2 Liberalization of Singapore’s Financial and Banking Market: Singapore’s answer to the 1997 Asian Financial Crisis
Singapore was already a blossoming financial cluster before the start of the 1997 Asian financial crisis, however the unprecedented events led the MAS and the Singaporean government to look for ways to strengthen local banks, and reinforce the attractiveness of the city-state as a hub for foreign banks in Asia.
Walter Russell Mead theorized this fierce competition to attract foreign capital in the financial sector with the notion of "millennial capital” (Mead, 2004, p. 74). It reflects the aim of many cities to attract foreign capital, and become financial clusters, hence making it a necessity for Singapore’s financial cluster to reform after the 1997 financial crisis. This was especially urgent, as many protectionist measures had been enforced in favor of Singaporean banks after Singapore’s independence.
Thus, as early as 1997 Singapore launched a Financial Sector Review Group to look for suitable strategies to reinvigorate the asset management industry, and formulate policies (Chew, 2001, p. 570). As a result, the MAS released the
“Statement on Measures to Liberalise Commercial Banking and Upgrade Local Banks” on May 17, 1999. It was a two-phase plan, the first phase being enforced from 1999 to 2001, and the second one from 2001 to 2004 (Monetary Authority of Singapore, 2001b).
This two-step liberalization process allowed for the MAS and the government to assess progress and challenges after the first two years, in order not to destabilize the local banking landscape.
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2.2.1 First phase of the reform
The first phase had three clear goals: starting the liberalization of the banking market, upgrading banks governance, and lifting the 40% limit that foreign investors were subjected to when acquiring the shares of a domestic bank (International Law Office, 1999).
Although this limit was subsequently lifted, up until today no Singaporean bank has been taken over by a foreign player, as it is unlikely the government would approve. Foreign shareholders must get approval from the MAS and the government when seizing more than 5%, 12% and 20% of a local banking institution (Bureau of Economic and Business Affairs, 2013, p. 5). This shows that the MAS is still focused on encouraging the rise of a homegrown financial industry, thus reflecting the long term vision of the government.
These goals, which in appearance seem to send a clear message to the market that Singapore is ready to let foreign and local banks play on a level playing field, were consequently counterbalanced by many regulations.
The most important change made in 1999 to allow Singapore to increase its international attractiveness, was to reshuffle its licenses scheme for foreign financial institutions into three distinct categories: qualifying full banks (QFBs), restricted banks, and offshore banks. This was a welcome move as new licenses had only been issued in 1970 and 1983 (Monetary Authority of Singapore, 2001c).
2.2.1.1 Qualifying Full Banks
The new QFB license was aimed at granting banks that under the previous system held a full bank license, or aspiring ones, greater privilege:
The opening of up to 5 branches, and ATMs in 10 different locations.
The possibility to share ATMs networks with other QFBs.
In order to qualify as a QFB several aspects are first considered: credit rating, and the “commitment to contributing to Singapore’s development as an international financial centre”, etc (International Law Office, 1999). This last statement can leave some to wonder in what measure the government would estimate the banks’
commitment to Singapore’s long-term plan. To further complicate things, the MAS
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decided to limit the number of QFB licenses delivered to a maximum of 6 for the first phase (Monetary Authority of Singapore, 2012a).
2.2.1.2 Restricted banks
The MAS following the 1999 reform updated the “restricted bank” status. This license aimed at banks not interested in developing domestic retail activities, i.e. only focused on wholesale activities.12
Their lending limit was increased and most restrictions on SGD swaps13 were lifted. However they were still limited to opening only one branch, and were restricted to only handling Singapore dollar savings above 250,000 SGD (Monetary Authority of Singapore, 2012a).
2.2.1.3 Offshore banks
The “qualifying offshore bank” (QOB) license is the one of those that grants the less freedom of operation to a foreign bank. It only allows operating into wholesale banking, and their lending limit is of 1 billion SGD. However they have been allowed to deal with Singapore dollar denominated swaps without any restrictions.
The most restrictive license of all is the basic “offshore bank” (OB) one that sets a lending limit of 500 million SGD (Monetary Authority of Singapore, 2012a).
2.2.2 Second phase of the reform
The second phase came as a shock for many. It consisted in totally reshuffling the license system again, trying to make it more clear. The MAS phased out the system that classified foreign banks as full, restricted, or offshore; and it has moved towards a licensing system that differentiates between retail and wholesale banks.
12 Wholesale banking consists of a mix of activities (it excludes what most people would require in their day-to-day life): consultancy, mergers and acquisitions, investment vehicle management, etc.
13 A swap is a financial agreement where two entities agree to exchange cash flow (based on a specific variable, such as interest rate) for a pre-agreed period of time.
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The reform has hugely benefited the overall banking and financial service industry of Singapore, while its share as a percentage of GDP was previously around 10%, during the liberalization process it climbed by a bit more than 2 points, to around 12% (Economic Review Committee, 2002, p. 4).
2.2.2.1 Outcome for local banks
While this liberalization process was mostly aimed at foreign banks, local banks were concerned but not from a regulatory point of view.
To safeguard the domestic banks, the MAS pushed local banks to merge in order to reach sufficient size, making sure that they would withstand the competition from QFBs (Lee & Bank of International Settlements, 2001).
By 2002, the liberalization resulted in the formation of three leading domestic banking groups:
Oversea-Chinese Banking Corporation (OCBC). In 2002, it acquired Keppel TatLee Bank (which was itself born from the merger between Keppel Bank and Tat Lee Bank in 1998) (OCBC Bank, 2012).
United Overseas Bank (UOB), which acquired Overseas Union Bank (OUB) in 2001 (United Overseas Bank, 2001).
Development Bank of Singapore (DBS), which took control of the Post Office Savings Bank in 1998
2.2.2.2 New license scheme for foreign banks
QFBs were granted even broader rights than they had got in the first phase, they were allowed to open up to 10 branches, compared to only 5 previously.
The Restricted Bank license was rebranded as the Wholesale Bank license, which consequently better reflected their specialization in the financial sector.
What’s more, Qualifying Offshore Bank (QOB) and Offshore Bank (OB) licenses were phased out, and this category was merged into the new Wholesale Bank status. Simultaneously, the number of banks awarded this new license was significantly increased (Monetary Authority of Singapore, 2001c)
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2.2.2.3 Outcome for foreign banks
As can be seen on Table 3, foreign banks have highly benefited from the financial liberalization process that was led from 1999 to 2004. They were granted greater rights than ever, and the license scheme was highly simplified.
Still foreign banks registered under QFB licenses did not benefit from the same right as local banks, which shows a bias against foreign players.
Figure 3
Evolution of License Scheme from 1999-2004
Phase 1