06 July 2010

Banks Should Not Consolidate Further

Like many other companies, Singapore banks wish to extend their geographical footprint to tap offshore business opportunities and grow their bottom lines.

But, banks are different from other commercial or industrial enterprises.

Firstly, banks serve important functions in the local economy, intermediating between their depositors and their borrowers.  They lend to the large multinationals and to the SMEs, which are mostly ignored by the global banking giants.  In the process, banks help them to grow.

Secondly, a significant part of their funding is derived from their non-bank customers — ordinary people like you and me — who place much of their life savings with the banks.  Their deposits are protected, but only up to the coverage level of deposit insurance, which stands at $20,000.

What will happen if one of the banks runs aground?

While the management of the banks will try to be prudent, it is their business to take risks; if they are overly cautious, they will likely achieve little and returns will be meagre.  However, human judgement and decision making are just that — human.  Seemingly well managed banks, even global behemoths, have failed.  It is unrealistic to expect that no Singapore bank will ever fail.

Adequate capitalisation is a defence, but too much of it is a drag on return.  However, even with a capital adequacy ratio of, say, 15 per cent, a bank has 6.67 times as much risk-weighted assets as capital, and this is after taking the credit risk of assets that are considered to be not so risky at less than their full face value.

Already, the three Singapore banks are probably too big to fail.  Reducing their number will ensure that they will be too big to fail.  But only because tax payers' money will be used to prevent the financial system from collapsing.

Depositors too may suffer, as deposit insurance may prove insufficient.

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