How will foreign banks' local incorporation affect Singapore's banking industry?

Foreign banks are now forced to decide whether to further commit to the Singaporean market and compete with domestic banks neck-to-neck, says ADB.

According to reports, a directive by the Monetary Authority of Singapore will force foreign banks to incorporate locally in Singapore. What does this say about the future of Singapore's banking industry?

ADB: Noritaka Akamatsu, Deputy Head, Office of Regional Economic Integration
Local incorporation is one of regulatory trends in response to the global financial crisis. With a branch, the host country regulator is relying on the home country supervisor for the supervision of the branch, and when its parent gets into trouble, the host country regulator often finds itself not having enough information or control over the entity to protect the domestic banking system and its depositors.

Local incorporation, while creating an additional job for the host country regulator, provides a better grip on the foreign banks operating in the country. By doing so, MAS can keep the Singaporean banking system safe and stable. ADB expects that this regulatory arrangement will be a trend across ASEAN, if not beyond.

The new regulation will force the foreign banks to self-select whether to further commit to the Singaporean market, that is expand and compete neck-to-neck with DBS and other domestic banks and so forth, or to limit the scope of their operation, for example have no retail deposit business and focus instead on wholesale banking. Those which are already deeply into retail business are likely to incorporate, and those which are not may rescope their business to focus on wholesale banking which does not require extensive branch networks particularly in Singapore.

IG Markets: Justin Harper, Head of Research
These measures to locally incorporate foreign banks should strengthen Singapore’s banking sector and bring it into line with international rivals such as Hong Kong and China. What it does is force banks to commit themselves to Singapore for the long-term. They will face significant set-up costs by incorporating themselves here and by doing this will signal their intentions to remain in the city for the long term. This will provide stability and security for the government along with retail clients.

Oliver Wyman: Jason Ekberg, Consultant
Eventually, it will help ensure the stability and strength of the Singaporean market. I think from a regulatory perspective, it’s questionable how big the impact is or should be in a lot of institutions because a lot of global banks most likely already have been secured in Singapore versus branches because it’s a favorable legal environment, regulatory environment, and pool of resources.

I think the impact on banks will most likely be relatively incremental assuming that most of them already have this theory. In Singapore, they basically are going to play some bets if they want to be incorporated there versus say, Hong Kong. I think it will probably make sense in the regulatory perspective just ensuring the foundation of integrity of the Singaporean market.
 

To read more about MAS' revised Qualifying Full Bank programme, click here.