While MAS will intensify its supervision, the first responsibility for soundness and prudence lies with the Board and management of the bank itself. Bank management must ensure that they have in place robust, group-wide risk management systems adequate to the new scale and risk profile of the combined entity. This again underlines the importance of top quality institutionalised, professional management for the banks. Competition We should not allow an enlarged bank, or a few banks in a consolidated banking industry, to use their market power to engage in monopolistic or other anti-competitive practices that raise prices, diminish consumer choice, or erect barriers to entry by other players. MAS does not think this will happen. It is unlikely that the largest bank in the system will have an over-dominant share. For example, if OUB merges with one of the larger banks, their combined market share of non-bank deposits will be at most about 30%. This will still be significantly less than the share of the largest banks in other small countries, like the Netherlands and Hong Kong. BIS Review 61/2001  3  Secondly, the competition will not just be among the remaining local players. The banking liberalisation programme will continue to introduce greater competition from foreign banks, in the range and pricing of products they offer and quality of service. Thirdly, the Government will be vigilant against any abuse of market power. The Competition Act that MTI is now considering will help us to do that.
The view that much of this growth reflects structural changes of this sort is supported in my view by the way the spread between deposit and loan rates of interest has vanished in the last few years (Chart 13). Of course that might be the product of competition between banks to lend more and attract more deposits; it also seems plausible that much of this lending is more about balance sheet restructuring than making a profit. However deposits associated with special purpose vehicles and intra-group only account for part of the growth. Even if we strip out all OFC deposits the growth rate of money has still been strong compared with the growth rate of money spending (Chart 14). In my final section I want to discuss what we should make of this. The significance of the money supply In the Treasury in the 1980s I was a close observer of the attempts to find a monetary aggregate as an intermediate target to guide policy. We were looking for both a predictable relationship between the policy instrument, interest rates, and the measure of money and a predictable relationship between that and our final objective, inflation. I remember the frustrations when both links proved unreliable. I am in no doubt that we are better off focussing directly on our final target, inflation. However I was struck, returning eighteen months ago to the economic debate, how the place of money in our debates had changed. Our model, like most others, is “new Keynesian”.