Focusing only on direct channels, the effects that one would expect to ripple back to the United States from problems in one or two EMEs typically look quite small. But, when all of the indirect channels of feedback are aggregated properly – which admittedly is difficult to do – the effects may be considerably larger. My point is that we tend to underestimate these feedback effects. For most of us, the market volatility of this past spring and summer still remains fresh in our minds. EME financial markets were hit hardest, with declines in equity prices, a widening in sovereign debt spreads, and a sharp increase in foreign exchange rate volatility. In the U.S., we saw a spike in Treasury yields, with 10-year rates rising by roughly 100 basis points from early May to early July, and rising by roughly another 30 basis points before peaking in early September. Most commentary has focused on the shift in expectations with respect to U.S. monetary policy – and, in particular, to uncertainty about the timing and implications of Fed tapering – as the catalyst for these moves. This focus seems generally right, although other factors also played a role. Market participants also had to evaluate the possibility that growth in China and other EMEs might be slowing even as growth in the U.S. and other advanced economies  BIS central bankers’ speeches  1  was picking up.
Deposit insurance makes clear where depositors stand: depositors know exactly how much of their money will be protected if a bank fails. Government statements that it will not bail out depositors beyond the insured amounts become more credible. However, deposit insurance is not without its downside. If its coverage is too broad, or it insures too large a proportion of deposits, it can cause the same problems as a government guarantee. A poorly designed deposit insurance scheme may make the banking system less rather than more stable. These problems can be mitigated if the deposit insurance scheme only insures small deposits, or sets premiums in line with the relative riskiness of banks, or discriminates between banks and subsidiaries that are incorporated here from those that are not. These are complex issues that need careful study, which MAS has begun. Conclusion This liberalisation package will provide further impetus for upgrading and progress in the local banks and Singapore's financial sector development. We will review the progress made in another 2-3 years, before deciding on further moves. Consolidation and continued liberalisation are important in building strong banks. But they are not in themselves sufficient. Banks must press on to upgrade their capabilities. They must keep abreast of international best practices, new products, technological developments and new ways of doing things, while retaining the support and confidence of consumers. ABS can play a part to help the banks do this. The government will do its best to maintain a sound regulatory framework, conducive to competition and innovation.