Strict laws govern such transactions;  3  BIS Review 53/2000  for instance, bank directors are jointly and severally liable to indemnify the bank for losses arising from unsecured loans to related companies. But problems will manifest themselves only in times of stress, as the Japanese and Korean experiences have shown. For the future, we need to restructure the banks’ participation in non-financial activities before potential vulnerabilities become actual problems. We have the luxury of acting now while the banks are sound; we must not delay or put off changes which are essential for their long-term wellbeing. The banking environment in Singapore will only become more open and competitive, and less forgiving of weaknesses or under-performance. Banks must concentrate on their core competencies and build strong and institutionalised management structures to compete in a globalised industry. Ultimately, their improved performance will benefit all depositors and shareholders, and strengthen the financial system as a whole. New structure The Government has therefore decided to require the local banking groups to segregate their financial and non-financial activities, and unwind the cross-shareholdings between the two. This will mean changes to their present corporate structures. These measures will apply to all local banks - OCBC, UOB and OUB, as well as DBS and KTB. There will be four key elements in the separation between the financial and non-financial entities: ownership, cross-shareholding, management, and name-sharing.
MAS recognises that the insurance funds are different in nature from the equity of the company or the group because they belong to the policyholders and not the shareholders. Therefore in principle investments using the insurance fund should be treated separately from the investments of the company and the group. Nevertheless the insurance fund should also be used only for portfolio investments, and not for the purpose of controlling other companies in the group, especially nonfinancial companies, whether by itself or together with other investments by the group. Currently, some banking groups have used these insurance funds as the vehicle for owning and controlling their investee companies. For example, the bank itself may own only 5% of an investee company, but the insurance fund of the insurance company may own another 15%, giving a total stake of 20%. This is not satisfactory, because it presents the same problems of contagion, non-transparency and dilution of management focus as the bank itself investing directly in these companies. BIS Review 53/2000  6  MAS will study the appropriate investment limits of insurance funds for both bank-related and independent insurers. The limits set should protect the interests of policyholders through adequate diversification, and ensure that the investments do not amount to controlling stakes. These measures will be developed in consultation with the industry, and are expected to be finalised by the end of the year.