Banking liberalisation provided the spur for our local banks to raise their game and compete with some of the world’s largest banks while maintaining high prudential standards and they have done well. We had previously announced the Government’s policy of maintaining the local banks’ market share at no less than 50% of total resident deposits. This remains our position. We are committed to having strong local banks at the core of the banking system. In a very real  BIS central bankers’ speeches  3  way, our three strong local banks also give Singapore the confidence to continue opening up the banking sector to foreign competition. Encouraging foreign banks to deepen their Singapore roots A diverse international presence and global connectivity must remain key strengths of Singapore’s financial centre. We host many international banks, who conduct an increasing share of their activities out of their Singapore offices. Some banks have moved their global heads of business to Singapore, or hubbed specific business lines or IT operations in Singapore. Consumers and corporate customers have benefited from the wider range of products and services, offered at competitive rates. The majority of foreign banks in Singapore operate as branches, taking advantage of the cost efficiencies arising from branching within an international bank. We continue to support the use of branches for the vast majority of banks in Singapore, which are in the wholesale and investment banking businesses. Additional measures may be appropriate for retail banks that are important to the domestic market.
There is a case that we should take some notice of this in the way the regime operates, rather than just ignore it. In summary, our experience of operating the MA suggests to us that the broad mechanism works but that the EU design makes insufficient allowance for uncertainty, the difference in riskiness between assets, and signals from the market. As a result of this, we are concerned that it overestimates the portion of future returns which can confidently be assumed to be free of risk for insurance companies and therefore safely banked as capital up-front. Some might suggest that this is fine, because insurance capital requirements are set to cover a 1in-200 year stress. [6] But that mixes up capital requirements and capital resources. The risk of a weak MA is that capital resources could be over-stated, and strong capital requirements are no defence if the capital being used to meet those requirements is not sufficiently solid. [7] The system as currently set up provides a particularly strong incentive for insurers to hunt out assets which happen to have a high return relative to their credit rating. Here is an intuitive way to think about the risk in this if taken too far, which our team calls the “high-spread-for-rating assets” – or more colloquially the “too-good-to-be-true assets” – issue. Imagine you have two bonds. [8] Both mature at the same time, both are in sterling and both have the same credit rating.