SOVEREIGN wealth funds (SWFs), such as Temasek Holdings and Government of Singapore Investment Corp (GIC), can play a key role in curbing the excesses of Western banking conglomerates, said a visiting top adviser to banks.

'We're entering a new era where consumers are starting to question the stability of even the biggest bank,' said Mr Michael Lafferty, a former banking correspondent of London's Financial Times daily.

He is now chairman of London-based Lafferty Group, which provides research and advice to banks and providers of retail financial services worldwide.

He spoke to about 60 bankers at a luncheon address entitled Paying The Price For Las Vegas Banking at the Shangri-La Hotel earlier this month.

He said that apart from injecting much-needed liquidity into the system, SWFs, as 'super institutional' shareholders, would have huge influence on, as well as a vested interest in, the stability of their own investments.

'The economic balance of power is turning towards Asia and the Gulf,' said Mr Lafferty, who is based in Britain.

According to data from research house Dealogic, SWFs made investments of US$24.4 billion (S$33.1 billion) in the first two months of this year, more than half of last year's total of US$48.5 billion. Those from Singapore were the most active, followed by the United Arab Emirates and then China.

GIC invested $9.8 billion in Citigroup in January and $14 billion in UBS last December, while Temasek pumped $6.4 billion into Merrill Lynch, as banks sought to replenish capital after the value of their US sub-prime mortgage-related assets dived.

Mr Lafferty said the mounting paper losses incurred by these investments are 'minor little disruptions' given their very long-term view of things. 'I don't think they would be unduly concerned.'

He also expects the trend of SWFs buying up stakes in financial institutions to continue.

'People will see sovereign wealth funds investing more and more in big banks in both Europe and North America. I'd expect more from Singapore, the Middle East and I'd expect a bit more from China. We're already seeing investments from China going into South Africa and also Nigeria.'

He added that SWFs 'can prevent abuses from happening' by helping to oversee the segregation of banking functions. In this respect, he feels that investment banking should be hived off into highly disciplined subsidiaries 'subject to stricter capital controls and more robust risk management'.

This article was first published in The Straits Times on April 28, 2008.