By Alvin Foo

FOREIGN banks here should keep looking long-term and stick with their clients through this financial storm, Prime Minister Lee Hsien Loong said last night.

And while the presence of foreign banks in these uncertain times poses potential risks to the financial system here, Singapore must remain open to the world, he added.

'Walling ourselves in does not mean that we would be safe; it just means we will starve,' he said.

Mr Lee was speaking at a dinner at the Shangri-La Hotel to celebrate Standard Chartered Bank's 150th anniversary here.

He said that in normal times, it may not matter who owns the banks, as they make loans based on similar commercial considerations. 'But in a crisis, it makes a crucial difference whether a bank has a long-term stake or a peripheral interest in Singapore,' he said.

Banks that have a long-term stake in Singapore - such as the three local banks - will consider the merits of borrowers and continue to nurture relationships with established clients.

This helps their clients and the economy to see through a crisis, Mr Lee noted.

But if Singapore was merely a peripheral part of a bank's business, it may cut staff or its presence here indiscriminately. 'If all banks behaved that way, the economy would be in trouble,' he added.

Still, foreign banks have come to play an important role in Singapore, and their entry has been good for the financial sector, said Mr Lee.

Many have expanded operations and made Singapore a regional or global platform for key banking services. The sector has grown by almost 80 per cent over the last 10 years. More diversity and an increased use of technology have also resulted in greater choice, better services and more competitive prices, he added.

The qualifying full banks (QFBs) are particularly important, said Mr Lee. Since 1999, QFBs have been given more freedom to open branches and expand their domestic retail banking networks.

'Having grown their domestic market franchise, QFBs should continue to take a long-term commercial view, stay with their clients and ride through the business cycle with them,' he added.

Turning to the local banks, Mr Lee noted that they are now 'fitter and have leaner and stronger managements'. The liberalisation forced them to sharpen their capabilities, he said. They consolidated from seven to three, held market share here and have also grown regionally.

But the creation of a more open and competitive financial sector also carries its risks. He said that while it is unlikely for a bank to fail here due to domestic difficulties, external problems may affect its operations here.

'If it is a major financial institution, there could be large ripple effects on the health of other banks and confidence in the entire financial sector,' he noted.

The Government will need to watch out for such contagion and make sure the financial system here is robust and stable, even in extremely volatile times.

It is also reviewing its regulations, added Mr Lee. 'Our basic framework has worked well, but we are scrutinising the system to minimise vulnerabilities. Where there are regulatory gaps, we will close them.'

Both regulators and banks will have to play their part, he noted. Regulators need to be alive to changes in the global financial system resulting from the crisis.

'In countries worst hit by this crisis, the banks will have to rebuild the trust of communities which they serve,' he said.

But while adopting reasonable safeguards, it is vital that Singapore remains open to the world. He said Singapore will continue to allow competition, operate a disclosure-based system, rely on market forces to allocate capital and encourage innovation in the financial sector.

These will be done within a framework of 'sound regulation and supervision'.

Mr Lee also touched on international cooperation, remarking that governments must cooperate to promote free trade amid growing pressure for protectionism.

Responding to Mr Lee's comments, key foreign banks said they remain committed to growing here.

Mr Peter Sands, StanChart's group chief executive, said: 'This is...where many of the key decisions get taken. We remain committed...to Singapore - for at least the next 150 years.'

HSBC Singapore's chief executive Guy Harvey-Samuel said: 'Our Singapore operations are strategically important to the HSBC Group and we are committed to investing and growing our business here to support our customers.'

This article was first published in The Straits Times.