Inderjit Singh (Ang Mo Kio GRC): Given that we have a strong financial system and fundamentals in Singapore, we should have been the first to react in Asia. Maybe after Europe, we could have been the first to react in the world.

My second question: By guaranteeing the deposits for all banks in Singapore, how will the Monetary Authority of Singapore (MAS) proactively monitor foreign banks who may take deposits from Singapore that are guaranteed by the Government and then use these deposits outside Singapore, maybe in investing, in helping, maybe, defend their own foreign subsidiaries and foreign home-based companies?

Lim Hng Kiang: As I emphasised in my statement, the financial system in Singapore is robust, stable and orderly, so there was really no reason for us to react. When the US and the European Union put in various measures to support their system, it didn't mean we must do likewise. There was no necessity for us to do so.

But when governments in our region decided to have blanket guarantees on deposits, first in Australia, then in Hong Kong, it sparked a dynamic and created a potential problem for us.

For example: Say Australia guarantees foreign branches of Australian banks. So the deposits at a branch of an Australian bank here are guaranteed by the Australian government. In Hong Kong's case, they guaranteed the branches of foreign banks situated in Hong Kong.

Similarly, a DBS customer can shift his deposits from Singapore to a branch in Hong Kong and that's guaranteed. He will still be supporting a Singapore bank, but his deposits are in Hong Kong.

We don't have to wait for these things to happen. We know such a blanket guarantee by surrounding countries will spark a dynamic and therefore we had to act.

The same day that we acted, Malaysia also provided similar guarantees.

Other countries have assessed their needs and have reacted differently. Indonesia increased the level of deposits that (are) being guaranteed.

If we had moved earlier, we may have been the one setting off the dynamic and I don't think that's the right thing for us to do. Our banks are stable and there's really no reason for us to be guaranteeing all deposits in Singapore.

Your second question: that branches of foreign banks in Singapore may be tempted to increase the level of deposits here and remit/invest the money overseas, and/or support their parent operations overseas. This is something that we are very mindful of and MAS, in its supervision of the various banks, especially branches of foreign banks in Singapore, will insist that as the deposits increase in their branch here, they must have corresponding liquid assets which are invested in Singapore to match these deposits.

Zaqy Mohamad (Hong Kah GRC): Couldn't we just provide the guarantee for local banks? We are using Singaporeans' money to provide guarantees for foreign banks.

LHK: This is not just a question of protecting deposits. This is a much larger agenda. The larger agenda is that we want to make sure the entire financial system in Singapore continues to contribute to our growth and our employment. Therefore, that would involve the foreign banks.

Cedric Foo (West Coast GRC): But the various banks in Singapore, they obviously have different balance sheets, different credit standings. Would the Government be charging the banks/financial institutions a guarantee fee and, if so, on what basis would it do so?

LHK: These are details which I would rather not go into in this House. Suffice to say MAS will be sending out detailed instructions to the banks on how they will be regulated in taking these new deposits and the basis for which charges for this guarantee will be levied.

Irene Ng (Tampines GRC): Singaporeans have been shocked by how reputable banks in foreign countries like the United States and United Kingdom have been collapsing. What is Singapore's position in terms of bailing out Singapore banks if they collapse?

LHK: We start off by preventing problems from arising. That means proper supervision, proper capital adequacy ratio, good business models, good practices, good lending practices and controls.

This is to make sure our banks are stable, have a good business model, a stable deposit base for which they conduct their lending operations. They are not so highly leveraged like banks in other countries. Hence, they are less vulnerable during a credit crunch because they are less dependent on the wholesale interbank market.

Teo Ho Pin (Bukit Panjang): Local banks' interest rates on savings deposits are much lower than interbank lending rates. This is one reason for a lot of Singaporeans putting their money into high-risk investments. Will MAS consider narrowing the (gap between the) savings interest rates and the interbank interest rates?

LHK: The interest rates are set by the market and MAS does not intend to intervene in the market. The interest rate will reflect market forces of demand and supply for funds.

Halimah Yacob (Jurong GRC): Will there be any conditions placed on the pay of senior executives of banks? The US imposed such conditions as part of its bailouts.

LHK: Unlike in the US, ours is not a bailout. Ours is a deposit insurance, a guarantee on deposits that we extended because we want to protect the banks in the financial system, and because we want to protect the financial system that is so critical to our economy and to all Singaporeans, and to the preservation of our growth and our jobs.

Inderjit Singh: Have any of our local banks applied for liquidity assistance from MAS?

LHK: The interbank markets here have been operating efficiently and in an orderly manner.

During the severe volatility that was faced in the international financial markets, there were concerns about liquidity, and MAS of course will inject liquidity into the system as and when required.

But no, there have not been specific applications for liquidity assistance by any of our financial institutions here.

Inderjit Singh: There were some reports of American International Group wanting to sell AIA, its life insurance arm. Will MAS intervene to ensure that the buyer is someone able to guarantee the insurance policies of members?

LHK: This is something that's still to be pursued and MAS will address the issues when the application does arise.

Cynthia Phua (Aljunied GRC): A number of new condominium developers offered deferred payment schemes in recent years. What's the impact on the financial institutions as well as small-time owners, purchasers?

Second question: Can the minister shed some light on the buffer/safety margins of our financial institutions?

LHK: There is a cap on exposure to the property sector. Banks are not allowed to go beyond 35 per cent. In fact, most of our banks stay well below this cap. The banks themselves and MAS continue to monitor this closely, and to do sensitivity tests as to what impact there will be should the property market decline by different amounts.

As for the impact of the en-bloc sales and the deferred payments, this is something that will unfold over the next 18 or 24 months.

As of now, the banks' exposure is well below the cap. They are extremely well-positioned to deal with the property downturn.

As for the safety buffers, I'm afraid there isn't one single factor to determine the so-called safety factors.

This requires a range of parameters. Suffice to say the banks in Singapore have a very high capital adequacy ratio, much higher than in other countries.

In other countries, many banks depend on the wholesale market for their funding requirements. Here, our banks have a very strong and broad depositor base, and the loan-to-deposit ratio is comparatively low, compared to other banks. So that gives them a lot of buffer.

Low Thia Khiang (Hougang): The minister said that AIA's exposure to sub-prime is limited. I'd like to know the amount involved.

I also understand that an insurance company is required to provide a deposit with MAS for each class of insurance or business. So what is the current market value of the deposit from AIA that MAS has held?

What is the composition and risk profile of AIA insurance funds, and what are the future outlooks of the funds, to meet future obligations of policyholders?

What is the current solvency ratio of AIA's participating funds in Singapore? Has it met the requirements under the risk-based capital framework of the MAS?

LHK: I think you can refer to the company's website for these specific details. There are disclosure requirements. Insurance companies in Singapore operate under a very strict regulation regime. They are required to maintain a capital adequacy ratio of at least 120 per cent, and all the insurance companies in Singapore far exceed this adequacy ratio. Many go to 200 per cent and above.

This article was first published in The Straits Times on October 21, 2008.