Stability of the Financial System in Singapore - Essay Example

What steps have been taken to enhance the stability of the financial system in Singapore What are the main steps that remain to be taken This Financial System Stability Assessment (FSSA) report is based on the work of three Financial Sector Assessment Program (FSAP) missions that visited Singapore in November 2002, July-August 2003, and September 2003. The FSAP findings were discussed further with the authorities during the Article IV consultation mission in December 2003. FSAPs are designed to assess the stability of the financial system as a whole and not that of individual institutions. They have been developed to help countries identify and remedy weaknesses in their financial sector structure, thereby enhancing their resilience to macroeconomic shocks and cross-border contagion. FSAPs do not cover risks that are specific to individual institutions such as asset quality, operational or legal risks, or fraud. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of Singapore or the Executive Board of the IMF. Introduction Singapore; the name inspires respect and trust. Today, it is looked upon with awe by people from all over the world, both from developed nations and the developing world. It is considered as a role model by the Asian countries. This has been possible because of Singapore's stable and slightly conservative economy, which has withstood the test of economic downturns and sudden asset price declines. Singapore's financial sector, which is dominated by the banking sector, remains robust despite a series of economic downturns and substantial asset price declines. Even when faced with a series of economic jolts and decline in asset price, the economy has stood on solid ground in the past few years. The local banks and insurance companies are endowed with huge capital and making considerable profits. Stress test results indicate that Singapore's systemically important banks and insurance companies could withstand further significant shocks. -Problem Statement What steps have been taken to enhance the stability of the financial system in Singapore What are the main steps that remain to be taken It would be our endeavour here to analyse the running of the financial system in Singapore, study the factors that contribute positively to it and also try to find if anything else needs to be done to create a positive impact on the financial system. Singapore's financial stability can be attributed in large to the smooth running and well organized set-up of the banks and their branches; both local and foreign. The insurance sector also plays a major role in contributing to this stability as it is also capital rich and highly profitable. It has weathered three major shocks: the Asian crisis in 1997-98; a sharp drop in electronics exports in 2000-01 (resulting in the worst recession since independence); and the outbreak of SARS in early 2003. This stability in the face of such downturns can be contributed to sound fiscal and monetary policies, long-standing external current account surpluses, significant external assets and reserve positions, the healthy corporate sector high household wealth, and conservative financial regulatory and supervisory practices. Conceptualization The steps been taken to enhance the stability of the financial system in Singapore include the following: 1. Banks dominate the financial sector Local banks, which hold more than one half share of domestic banking assets, are profitable and well capitalized. They are also liquid, have enough back up for non performing asset exposures, and conservative in their management practices. The insurance sector, though contributes only 6% to the total assets of the system, too is well capitalized and doing good business. Systemically important banks (including major foreign bank branches) and insurance companies have been shown to withstand major shocks under test conditions. 2. Systemic liquidity is well managed The Monetary Authority of Singapore (MAS) makes sure that the payment system and the financial system as a whole run smoothly. The overnight facility introduced in 2001 has helped reduce the volatility of short-term interbank rates. 3. Observance of International Regulatory Practices International standards and codes are followed strictly across all segments of the financial sector. This guarantees a global appeal for foreign investment in Singapore. It has also been recognized as a major international financial sector, thanks to the economic and political stability in the country. Macroeconomic foundations are robust and modern infrastructure encouraging for the foreign investor. 4. Efficient legal system Singapore has an efficient legal system to support the financial sector accounting standards that closely follow international best practices, and ongoing initiatives to promote good corporate governance and to strengthen the framework of disclosure practices. Nevertheless, there is scope for the MAS to further enhance its accountability and independence, regulatory framework, and disclosure of information. The MAS has initiated a review of the MAS Act to address the accountability and independence issues and is studying ways to disclose more information to improve the public's ability to assess its supervisory performance. 5.Liberalization and Financial Reforms since 1998 In an attempt to further improve its economy, Singapore has made its policies more investor friendly for foreign investors. It has been following international standards in corporate governance and best management practices. Various reforms have been carried out in the capital /equity markets and the domestic banking sector. In 2002, all restrictions on the use of the Singapore dollar in international transactions were removed, except for a few existing ones. Yearwise Legislative and regulatory reforms are listed below: 2001 The Companies Act was amended to enhance prospectus disclosure requirements. An amendment to the Banking Act brought into force new policy measures, including the separation of financial and nonfinancial businesses of local banks, and the revision of the rules on property-related loans to more effectively monitor banks' exposure to the property sector. The new Liquidity Supervision Framework was passed to tie liquid asset requirements to a bank's liquidity profile and risk management capabilities. 2002 The Financial Advisors Act (FAA) was enacted to integrate the different acts governing financial advisory services and to streamline licensing requirements, and the Securities and Futures Act (SFA) to consolidate legislation of capital market activities and introduced disclosure-based market supervision. A risk-based capital framework for securities for capital markets services license holders came into force. The Payment and Settlement Systems (Finality and Netting) Act was enacted to provide for protection of the payment and settlement systems from disruptions. The Consumer Credit Bureau was established. 2003 The Code of Corporate Governance took effect. Although the Code is not mandatory, all listed companies are required to disclose their governance practices and any deviations from the Code in their annual reports. Listed companies with market capitalization of S$75 million or more were required to make quarterly reports. 6. Low leverage in the Corporate Sector As compared to other developed economies in Asia or the U.S and U.K, the companies in Singapore have a lower debt-equity ratio. 7. Singapore is closely connected with the global financial system. Singapore's international financial linkages could not only potentially act as transmission channels for external financial shocks to Singapore's domestic financial sector but could also mitigate domestic financial shocks. 8. Household net worth is high High incomes and savings rate among the population leads to higher net worth as compared to other advanced economies , as France, U.S, U.K. 9. Consistently profitable non financial corporate sector The non financial corporate sector was consistently profitable from 1997 through 2001 when Singapore faced a series of adverse shocks, reducing the vulnerability of the financial sector to these shocks. Measures to develop capital markets 1999 The Singapore Exchange (SGX) was formed following the demutualization and merger of the Stock Exchange of Singapore and Singapore International Monetary Exchange. 2000 Repo-related Singapore government securities (SGS) holdings were allowed to count toward the liquid asset requirement to boost the repo market. A securities lending facility for primary dealers of SGS securities was introduced. The SGX was listed on the SGX Main Board. 2001 Investment restrictions on CPF Special Accounts were liberalized. The five-year SGS bond futures contract was launched by the SGX. Fifteen-year SGS bonds were issued to extend the benchmark yield curve. 2002 A new SGX listing manual came into effect. The changes include revised distribution guidelines for initial public offerings. The borrowing period for the securities lending facility was extended, and full order book information on the SGX securities market was made available to investors on a subscription basis. Methods Steps to be Taken to Enhance Stability 1. Exposure to exogenous shocks must be reduced Catering to global needs, Singapore's economy is not immune to economic slowdowns, which could happen in other parts of the world. The Asian crisis in 1997-98; a sharp drop in electronics exports in 2000-01 (resulting in the worst recession since independence); and the outbreak of SARS in early 2003 had a considerable impact on the economy. There must be enough planning to absorb such shocks in the future. 2, Shock proof the economy Going forward, the main potential risks to the profitability of the financial sector include, reduction in external demand, continued weakness in the labor market, higher interest rates and lower asset prices. 3.Terrorism Threat There has been an impending fear of terrorism in this region, threatening to destabilize the economy. Terrorism has to be combated on a local and a global scale to ensure the proper functioning and growth of the economy. 4. Changes in the Capital Market The MAS is planning to introduce an intraday liquidity facility in along with upgrading of the payment system. As the authorities move from a rule-based to a risk-based approach to manage systemic liquidity, the liquidity requirements should be further reviewed to help local banks improve their profitability. 5.Linkages to the global financial system should be more closely monitored to enhance early warning capabilities. Local banks' operations include overseas branch operations and in the Asian Dollar Market (ADM)-an offshore banking market. Local banks are increasingly exposed to external shocks through their growing overseas operations, but diversification in emerging and advanced markets would help dampen the effects of domestic shocks. Local banks' activities in the ADM are mainly interbank lending, which has experienced virtually no losses even during the Asian crisis. Although the regulatory systems and supervisory practices exhibit a high degree of observance of international standards and codes, the FSAP team made some specific recommendations to further enhance the risk-based regulatory and supervisory framework, strengthen the accountability and independence of the Monetary Authority of Singapore (MAS), and improve monetary and financial policy transparency. Key Policy Recommendations have been as follows: Macro-prudential monitoring: Further strengthen the MAS' monitoring of: (i) the risks arising from new financial products; (ii) cross-border financial flows (including flows in the ADM and particularly transactions between branches and head offices) to detect potential strains in the offshore banking market; (iii) household and corporate sector balance sheets to assess the resilience of the private sector; and (iv) market and counter-party risks of derivatives activities by financial institutions. Regulatory systems and supervisory practices: Further enhance the MAS' legal and regulatory framework through the completion of the review of the regulatory minimum capital requirements for local banks and the implementation of its new risk-based capital framework for the insurance industry, planned for introduction in late 2004; and complete the ongoing review of the MAS Act. The MAS' accountability, independence, and oversight capabilities: Reduce the potential for conflicts of interest arising from the multiple official responsibilities of the Chairman of the MAS. Monetary and financial policy transparency: Provide more information on how supervisory actions are taken in line with the risk-based supervisory framework and disclose more information to improve the public's ability to assess supervisory performance. Anti-money laundering and combating the financing of terrorism: Improve the effectiveness of cross-border mutual legal assistance. Capital market development: Review and address factors that may constrain the further development of the corporate bond market, including the limited use of credit ratings, guaranteed interest rates of the Central Provident Fund (CPF), and the CPF investment policy. Source: https://www.imf.org/external/pubs/ft/scr/2004/cr04104.pdf Read More