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No need for panic as regulatory approach ensures banks are solid

THE questions came fast and furious: How well are insurance policies protected? Are offshore banks safe? Can the Government make banks raise the guaranteed amount for deposits?

In an uncertain economic climate that has seen seemingly rock-solid financial institutions in the United States topple one after another, anxious residents yesterday quizzed the Finance Minister himself on Singapore’s financial system.

Mr Tharman Shanmugaratnam assured them Singapore is ‘not in the same situation as the US’.

‘We need not panic,’ he told residents at a dialogue in Toa Payoh East.

One resident noted that if there is a run on a bank here, depositors are protected for up to $20,000 in their accounts. ‘I think many of us have more than $20,000. Can the minister do something to make the bank increase the guaranteed amount?’ he asked.

Mr Tharman replied: ‘I can assure you our Singapore banks are well regulated and there is no risk and no reason whatsoever to have a run on our banks.’

Singapore has been ‘old-fashioned’ in its strict regulatory approach to make sure banks have adequate assets, and do not over-lend to property owners.

‘So frankly, you need not worry about how solid our banks are, your money is safe,’ he said.

If banks are made to increase the guaranteed amount from $20,000, it will mean higher costs, ultimately borne by the customer. ‘So I would say this system is better: regulate the banks well, keep deposit insurance cost low.’

To another resident who wanted to know how well-protected Singaporeans’ insurance is, Mr Tharman stated categorically: ‘You can have equal confidence in our insurers.

‘Any insurance company operating in Singapore, including the foreign companies, have to abide by strict regulations.’

As for offshore banks, they are required to maintain assets in Singapore to meet their liabilities, he added.

‘It is not possible for anyone to say all banks are safe, but what I can say is our local banks are safe, and foreign banks in Singapore are subject to tighter regulations compared to most other places.’

Ultimately, consumers must have their eyes open when going to financial institutions, and judge where their money is safe, he said. ‘This is a responsibility that you have. Especially when people offer you higher interest or higher returns, your eyes must open even wider.’

The minister repeated this point when telling reporters later that there were lessons to be gleaned from the crisis.

The system can be improved, he acknowledged, whether on the part of the regulator, the Monetary Authority of Singapore (MAS); financial institutions; or the consumer.

‘The MAS approach is one that balances regulation with responsibility on the part of the institution and the investor. All three play a part, and in all three areas, I’m sure there can be improvements, coming out of the recent problems.’

But he warned against over-regulating, saying risk is inherent in the system.

‘We have to avoid swinging in a pendulum-like fashion when it comes to the regulation of financial products.

‘There have to be improvements in marketing and selling and disclosure. There are learning points coming out from the recent problems.

‘(But) let’s not swing to over-regulation because that is going to increase costs and it’s going to reduce the range of products that meet everyone’s needs.’

He cited as an example Lehman Bonds, which, as late as July, were rated A1 by credit-rating agency Moody’s. The highest rating is Aaa.

‘Should MAS say A1 bonds should not be bought by people? I think that would be over-regulation, but it turned out that Lehman Bonds went bust.

‘So it’s an example of how there is risk in the system, there is no way you can get it out of the picture by over-regulation unless you over-regulate to the extent you cut out options to sensible investors.

‘So let’s find a suitable middle ground (to) improve the system.’

Source : Straits Times - 6 Oct 2008

Banks see term deposits as alternative source of funds amid credit crisis

BANKS that are hungry for cash amid the global credit crunch have unleashed a string of eye-catching promotional rates for fixed deposit accounts.

This spells good news for customers with cash parked in bank deposits.

The interest rates on offer may still be well below the inflation rate, but they are far higher than typical term deposit rates in Singapore.

And amid severe stock market volatility and a cooling property market, cash in the bank is a fairly safe investment.

Take Standard Chartered Bank (Stanchart), for example, which is dangling a rate of 1.688 per cent a year for a 100-day tenor on a deposit of at least $50,000.

If you have more money to put in the bank, you stand to reap a solid 1.958 per cent a year for a minimum deposit amount of $500,000 over two years.

This means after two years, $500,000 placed with Stanchart should return a depositer close to $520,000.

At Citibank, customers enjoy a rate of 1.65 per cent a year on a one-year time deposit of $10,000 and above if they set up a new salary credit account with the bank.

At Maybank, customers who place $25,000 to $500,000 receive a healthy interest rate of 1.9 per cent a year, for a three-year term.

Consumers even get their interest paid upfront, said Ms Helen Neo, Maybank Singapore’s head of consumer banking.

‘The upfront time deposit promotion is to reward our customers so that they can re-invest their interest earned. Customers would also appreciate receiving their interest earlier rather than upon maturity,’ she said.

Some local banks have also got into the fixed deposit promotional rates frenzy.

United Overseas Bank, for instance, is offering customers 2 per cent a year on a three-month fixed deposit, and 1.36 per cent a year on a 15-month fixed deposit when they place a minimum of $25,000 for each deposit. This dual-term fixed deposit promotion is available only for a limited period, the bank said.

Consumers point out that these rates are attractive, given that average three-month fixed deposit rates and savings rates from banks in Singapore can be as low as 0.425 per cent and around 0.25 per cent respectively.

‘I might move about $50,000 or more into one of these promotional offerings, because deposit rates are so low and inflation is eating away at my money,’ said 26-year old business owner Justin Kho.

Mr Kho, who currently has a one-month fixed deposit with DBS Bank yielding around 0.325 per cent, said he would review his options with the bank, in the light of these better returns.

Analysts say it is understandable why some of these banks are dishing out these tantalising returns.

‘The global credit crunch and interbank liquidity squeeze may have contributed to banks turning to fixed deposits as an alternative source of near-term funding,’ said OCBC Bank economist Selena Ling.

Basically, with the tighter credit conditions, banks are unwilling to lend money to each other, and this has the effect of making money harder to borrow.

This scarcity of short-term liquidity has seen the three-month Singapore Interbank Offered Rate (Sibor) jump by one percentage point in just a month to more than 2 per cent.

With banks needing fresh capital for their operational needs or to shore up their balance sheets, money roped in from fixed deposits would certainly come in handy.

‘If you’re a foreign bank, you either borrow from the interbank market or tap your own deposit base for capital, but unlike local banks, foreign banks may not have such a large deposit base,’ said Mr Joseph Chong, chief executive of financial advisory firm New Independent.

Phillip Securities Research analyst Brandon Ng suggested that DBS, for instance, has a huge retail deposit base. This could be one reason why the bank has not been launching promotional fixed deposit rates, unlike foreign banks.

Not surprisingly, DBS said it has not seen a rise in fixed deposits.

Stanchart consumer banking head Ajay Kanwal said that in the last month, the bank has seen a quick rise in deposit interest rates, mainly on account of the rise in three-month Sibor.

That, he said, is in turn influenced by two key factors: United States interest rates and domestic loans demand.

Source : Straits Times - 6 Oct 2008

Dow ends 157 pts down as mood sours after rescue Bill is passed

FOR many investors, the unfolding drama on Wall Street resembles Hong Kong director Benny Chan’s latest movie Connected in many ways.

Those who stayed up on Friday night to watch the outcome of the US House of Representatives’ vote on a US$700 billion (S$1 trillion) bailout package would find one scene from the action-packed film particularly relevant.

In it, the car driven by the hero (Louis Koo) lurched out of control and went hurtling down a slippery slope. He managed to get out only seconds before the vehicle plunged down a cliff.

On Wall Street last Friday, feverish anticipation that the rescue package for financial institutions would be approved sent the Dow Jones Industrial Average up by as many as 313 points in early trading.

But the mood soured after the Bill was passed. The Dow slipped precipitously and ended 157 points down as selling accelerated in an alarming manner.

So what should investors do? Are financial markets careening out of control like Louis Koo’s car before it crashed?

The US$700 billion rescue package was supposed to inject a massive vote of confidence into financial markets, buy troubled assets off US banks and get them to start lending to each other again.

But the global credits markets have stayed frozen, despite efforts to unclog them.

The squalls unleashed by the death of Lehman Brothers and near-collapse of American International Group last month have transformed into a gale-force wind threatening even the world’s biggest banks.

The Libor rate - the interest rate for US dollars at which banks lend to each other - is almost double the US Federal Reserve’s short-term interest rate of 2 per cent.

There are reports that some banks are charging much higher rates and lending only on an overnight basis, in case their borrowers run into financial difficulties.

Even the world’s largest companies are not immune to the credit crisis.

Last week, rather than try to draw down on its massive credit lines, General Electric sold US$3 billion worth of preference shares to investor Warren Buffett on very generous terms.

The state government of rich and powerful California was forced to approach the US government for emergency funding to pay its bills.

To traders here, all these gloomy reports have a surreal feel. But beneath the sea of calm, there is increasing anxiety. Last week, the benchmark Straits Times Index fell 4.7 per cent to a 26-month low of 2,297.12.

Among the worst hit were biggies such as Keppel Corp and Sembcorp Marine which were considered to be strong defensive plays because they could ride out the financial storm with their fat order books.

But the credit crunch has also severely affected hedge fund managers, as they cope with the big flood of redemption orders from jittery investors. So it is no surprise that rig-builders should come under selling pressure, since these stocks were among their favourite picks last year.

How will it all end?

In Connected, Louis Koo was shown on top of a mountain resembling a Master of the Universe, back in charge of his destiny after his near-death experience.

For the central bankers charged with saving the global financial markets from hubris, a similar miracle will be appreciated.

Source : Straits Times - 6 Oct 2008

Panic is the enemy

WATCHING the slipping economy and Congress’ epic debate over the unprecedented US$700 billion (S$1 trillion) financial bailout, it is impossible not to wonder whether this is 1929 all over again. Even sophisticated observers invoke the comparison. Martin Wolf, the chief economics commentator for The Financial Times, began a recent column: ‘It is just over three score years and 10 since the (end of the) Great Depression.’

What’s frightening is not any one event but the prospect that things are slipping out of control. Panic - political as well as economic - is the enemy.

There are parallels between then and now, but there are also big differences. Now as then, Americans borrowed heavily before the crisis - in the 1920s for cars, radios and appliances; in the past decade, for homes or against inflated home values. Now as then, the crisis caught people by surprise and is global in scope. But unlike then, the federal government is a huge part of the economy (20 per cent versus 3 per cent in 1929) and its spending - for Social Security, defence, roads - provides greater stabilisation. Unlike then, government officials have moved quickly, if clumsily, to contain the crisis.

We need to remind ourselves that economic slumps - though wrenching and disillusioning for millions - rarely become national tragedies. Since the late 1940s, the United States has suffered 10 recessions. On average, they have lasted 10 months and involved peak monthly unemployment of 7.6 per cent; the worst (those of 1973-75 and 1981-82) both lasted 16 months and had peak unemployment of 9.0 per cent and 10.8 per cent, respectively. We are almost certainly in a recession now; but joblessness, 6.1 per cent last month, would have to rise spectacularly to match post-World War II highs.

The stock market tells a similar story. There have been 10 previous postwar bear markets, defined as declines of at least 20 per cent in the Standard & Poor’s 500 index. The average decline was 31.5 per cent; those of 1973-74 and 2000-02 were nearly 50 per cent. By contrast, the S&P’s low point so far (Friday, Oct 3) was 30 per cent below the peak reached in October last year.

The Great Depression that followed the stock market’s collapse in October 1929 was a different beast. By the low point in July 1932, stocks had dropped almost 90 per cent from their peaks. The accompanying devastation - bankruptcies, foreclosures, bread lines - lasted a decade. Even in 1940, unemployment was almost 15 per cent. Unlike postwar recessions, the Depression submitted neither to self-correcting market mechanisms or government policies. Why?

Capitalism’s inherent instabilities were blamed - fairly, up to a point. Over-borrowing, over-investment and speculation chronically govern business cycles. But the real culprit in causing the Depression’s depth and duration was the Federal Reserve. It unwittingly transformed an ordinary, if harsh, recession into a calamity by permitting a banking collapse and a disastrous drop in the money supply.

From 1929 to 1933, two-fifths of the nation’s banks failed; depositor runs were endemic; the money supply (basically, cash plus bank deposits) declined by more than a third. People lost bank accounts; credit for companies and consumers shrivelled. Economic retrenchment fed on itself and overwhelmed the normal mechanisms of recovery. These channels included: surplus inventories being sold, so companies could reorder; strong firms expanding as weak competitors disappeared; high debts being repaid so borrowers could resume normal spending.

What’s occurring now is a frantic effort to prevent a modern financial disintegration that deepens the economic downturn. It is said that the US$700 billion bailout will rescue banks and other financial institutions by having the Treasury buy their suspect mortgage-backed securities. In reality, the Treasury is also bailing out the Fed, which has already - through various actions - lent financial institutions roughly US$1 trillion against myriad securities. The increase in federal deposit insurance from US$100,000 to US$250,000 aims to discourage panicky bank withdrawals. In Europe, governments have taken similar steps; last week, Ireland guaranteed its banks’ deposits.

The cause of the Fed’s timidity in the 1930s remains a matter of dispute. Some scholars suggest a futile defence of the gold standard; others blame the flawed ‘real bills’ doctrine that limited Fed lending to besieged banks. Either way, Fed chairman Ben Bernanke, a scholar of the Depression, understands the error. The Fed’s lending and the bailout aim to avoid a ruinous credit contraction.

The economy will get worse. The housing glut endures. Cautious consumers have curbed spending. Banks and other financial institutions will suffer more losses. But these are all normal symptoms of recession. Our real vulnerability is a highly complex and global financial system that might resist rescue and revival.

The Great Depression resulted from the mix of a weak economy and perverse government policies. If we can avoid a comparable blunder, the great drama of these recent weeks may prove blessedly misleading.

THE WASHINGTON POST WRITERS GROUP

Source : Straits Times - 6 Oct 2008

Despite his July forecast of a recession coming true, Tony Tan still sees opportunities for fund

WHEN Dr Tony Tan, executive director of Singapore’s biggest sovereign wealth fund, warned in July that the world might plunge into its worst recession in 30 years, many shrugged off his remarks as too gloomy.

Three months later, Dr Tan’s prophecy of doom is becoming a reality as the credit crisis ravages US and European banks and takes a toll on the global economy.

Dr Tan’s Government of Singapore Investment Corp (GIC) is meanwhile sitting with 7 per cent of its estimated US$300 billion (S$435 billion) portfolio in cash and another 26 per cent in G-7 government bonds.

Dr Tan, a 68-year-old former finance minister, professor and banker, and his team are now cautiously sifting through the financial carnage to shop for distressed assets in the United States in an effort to boost long-term returns for the fund.

GIC released its first performance report last month, after increased scrutiny of sovereign funds by Western lawmakers who want them to be more transparent, and revealed a 4.5 per cent real return in Singapore dollar terms over 20 years.

‘We should not assume that the worst is over and we continue to be watchful and prudent in our assessment of the economic risks and in our investments,’ Dr Tan, who is also the fund’s deputy chairman, told reporters at the launch of the report.

Mr Song Seng Wun, a Singapore-based economist with Malaysia’s CIMB, said Dr Tan’s long stint with the private and public sectors made him experienced enough to guide GIC through the crisis.

‘I don’t think you can compare him to an investor like Warren Buffett,’ he said. ‘But he is an old hand who has seen the ups and downs of the Singapore economy and it is good to have someone like him steering the ship.’

GIC, which manages part of Singapore’s foreign reserves, ploughed US$18 billion into UBS and Citigroup in December and January, though shares of the two banks have since fallen. By contrast, Mr Buffett, regarded as one of the world’s greatest investors, waited until the past two weeks to spend US$8 billion on shares in Goldman Sachs and General Electric.

Dr Tan has said US investments will remain a big part of his portfolio, but GIC has said it may use some of its cash to buy emerging market stocks in Asia.

Dr Tan joined GIC in 2005 after a stint as the chief executive officer of Singapore lender Oversea-Chinese Banking Corp and over a decade in politics, which followed a PhD in applied mathematics.

Dr Tan, who has his hair slicked back and wears vintage dark-rimmed glasses, became finance minister and was tipped by Singapore’s first prime minister Lee Kuan Yew as his successor. The post eventually went to Mr Goh Chok Tong in 1990.

‘He has a quick brain and there is a decisive quality about him. He listens, takes all points of view and decides,’ Mr Lee said of Dr Tan in 1988. Mr Lee is the chairman of GIC but leaves its day-to-day running to Dr Tan.

GIC has limited its losses on UBS and Citi by taking advantage of price reset clauses in its original agreements. Dr Tan has said GIC has room for investing in another bank.

‘We always look at the risk first,’ Dr Tan said in January. ‘Our philosophy is if you look after the downside, the upside will look after itself.’

REUTERS

Source : Straits Times - 6 Oct 2008