On the few occasions when a foreign bank has run into difficulties, MAS has managed to ring-fence the banks' Singapore operations in time – as we did during the Asian crisis – so that Singapore depositors did not suffer losses. However, as we liberalise, foreign banks will gain market share. Local banks will also venture abroad. The safety and soundness of both local and foreign banks will increasingly be affected by factors beyond our control. We have seen how in other countries even well-run international banks supervised by highly-regarded authorities can nevertheless run into financial trouble. Even as we strengthen MAS supervision, we cannot expect our supervisors to always be in time to pre-empt any difficulties that the bank has not prepared itself for. No government can promise to bail out depositors whenever a bank runs into trouble. If a government did so, depositors would lose the incentive to seek out sound banks, and banks would lose the incentive to lend prudently, knowing that even if they run into trouble their downside risks will be absorbed by the government. This is what bankers call moral hazard. However, in the absence of a deposit insurance scheme, there will be an implicit expectation, both by depositors and banks, that if something goes wrong, particularly with a large bank, the government will be there to pick up the pieces. And should a mishap happen, the government may come under strong political pressure to do so. This can be destabilising.
This will allow us greater flexibility to ringfence the subsidiary, and minimise contagion arising from problems that may emanate from the bank's home market or global operations, especially where the home jurisdictions have laws which favour depositors in the parent bank over depositors in overseas branches. Subsidiarisation will not turn the subsidiary into a local bank. The foreign parent bank will in most cases own 100% of the subsidiary and want full control over its activities. MAS will continue to treat the subsidiary as a foreign bank, and will exempt it from a requirement placed on local banks to maintain a majority of Singapore citizens or permanent residents on their board of directors. 6  BIS Review 61/2001  MAS is studying this issue and will make a decision later this year. We would not be the only jurisdiction with a subsidiarisation requirement. Several reputable jurisdictions, such as Australia, the US, and Canada, go even further and require that in order to accept any retail deposits at all, foreign banks must incorporate locally and meet the minimum capital requirements imposed on locally incorporated banks. Deposit insurance We will study the need for a deposit insurance scheme in Singapore. Unlike most countries, Singapore does not have a deposit insurance scheme. In the past, sound management and conservative practice by the local banks, coupled with strict regulation and supervision by MAS, helped to avoid problems in our banking system.