In our reform proposals issued in June 1999, we noted that: "The process of improving allocation of resources, reducing cross-subsidisation and introducing more transparent pricing is one of the objectives of deregulation and should not be resisted. However, it needs to be understood that there will be both winners and losers among bank customers." In practical terms, as experience in other centres has shown, removal of interest controls tends to be accompanied by moves such as the imposition of fees and charges and the tiering of interest rates. Banks will also review their existing cost structures and streamline unprofitable services and branches. They will attempt to maximise customer use of cheaper delivery channels such as ATMs, telephone banking and the internet. These are inevitable trends that would happen with or without deregulation. The competitive changes that are already taking place in the market would in any case oblige banks to try to reduce costs and to increase fee income to make up for the slower growth in net interest income. What deregulation will do is to act as a catalyst for change and to focus the banks’ minds on the need to react sooner rather than later. This process is not without controversy, as we have seen in the reaction to the recent announcements by some of the major banks of revisions to their fees and charges.
Unlike most other banking systems in the region, we have had the luxury of being able to look ahead without being distracted by the need to cope with a banking crisis. Of course, the banking sector here has had its ups and downs over the last few years. But the results of the banks for the year 2000 showed that they have consolidated their recovery from the Asian Crisis. Pre-tax operating profits of the local banks rose in aggregate by 38% in 2000. Admittedly, this largely reflected the decline in bad debt provisions. But even if we strip this out, profits still rose by a reasonable 10%. This recovery should however not disguise the fact that a banker’s job is not an easy one at present. This is shown in two main features of current market conditions. The first is that domestic loan demand has not yet shown a sustained recovery. This reflects continued sluggishness in private sector investment, recourse by the corporate sector to other forms of financing such as the equity and bond markets and the lack of revival in the residential property market which has reduced the demand for mortgage loans. Related to this is the fact that the banks are flush with liquidity. A recent study by Goldman Sachs concluded that the surplus deposits in the banking system had tripled since 1997 to reach $ trillion. According to the study, this represents 124% of GDP, the highest percentage in the world.