VZCZCXRO0285
RR RUEHCHI RUEHDT RUEHHM RUEHNH RUEHPB
DE RUEHGP #1127/01 2950918
ZNR UUUUU ZZH
R 210918Z OCT 08
FM AMEMBASSY SINGAPORE
TO RUEHC/SECSTATE WASHDC 5905
INFO RUCPDOC/USDOC WASHDC
RUEHLO/AMEMBASSY LONDON 0528
RUCNASE/ASEAN MEMBER COLLECTIVE
RUCNARF/ASEAN REGIONAL FORUM COLLECTIVE
RUEHHK/AMCONSUL HONG KONG 6418
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 04 SINGAPORE 001127
SENSITIVE
SIPDIS
STATE FOR EEB/OIA
STATE PASS TREASURY FOR CCARNES, BMURDEN, MNUGENT
E.O. 12958: N/A
TAGS: ECIN ECON EFIN PGOV PREL SN
SUBJECT: DEPOSIT INSURANCE DOMINOS FALLING ACROSS SE ASIA
REFTELS
A. Hong Kong 1909
B. Kuala Lumpur 897
C. Jakarta 1923
D. Jakarta 1897
E. Bangkok 1560
1. (SBU) Summary: Last week, Southeast Asian governments' limited
deposit insurance schemes fell like dominos. Even though
authorities
insist that their financial systems are strong, expansions of
deposit
insurance in competitor jurisdictions outside Southeast Asia,
especially Hong Kong, Australia, and the U.K., prompted a preemptive
expansion of guarantees by Southeast Asian governments. The new
guarantees -- generally expected to be in place until the end of
2010
-- reverse the post-Asian financial crisis trend of gradual
reduction
of the amount of deposits insured. Only Indonesia seems to be at
risk of any pressure on deposits right now, but Thailand may see
flight of larger depositors next year if the implementation of its
scheduled reduction in deposit insurance coverage is not postponed.
End Summary.
2. (U) This cable was drafted by regional Finatt/Singapore with
coordination and contributions from econoffs in Hong Kong, Kuala
Lumpur, Jakarta and Bangkok.
----------------------------------------
Singapore: Hong Kong actions push change
----------------------------------------
3. (U) After markets closed on October 16, the Monetary Authority of
Singapore (MAS) and Ministry of Finance announced that Singapore
will
guarantee all local and foreign currency deposit of individuals and
non-bank customers in banks, finance companies and merchant banks
licensed by the MAS until the end of 2010. This represents a
significant expansion from the previous policy of only insuring the
first S$20,000 (approximately US$13,600) of Singapore dollar
accounts
only for individuals and charities. The guarantee will be backed up
by S$150 billion (approximately US$102 billion) of Singapore's
fiscal
reserves, which are distinct from the foreign exchange reserves of
the MAS. (Note: As required by the constitution, the program was
approved by Singapore's President whose job it is to safeguard the
use of Singapore's fiscal reserves.)
4. (U) Singapore was motivated by the deposit insurance expansion
announced by Hong Kong (reftel A) on October 14. Specifically, Hong
Kong Monetary Authority (HKMA) announced that, effective
immediately,
it will guarantee all bank deposits until the end of 2010 and
provide
supplementary capital to banks as necessary, using the HKMA's
Exchange Fund to back up the plan. Hong Kong previously had a
deposit insurance scheme capped at HKD 100,000 (approximately
US$12,800). Hong Kong authorities contended that they were
following
the lead of other governments, not because of concerns about banking
system health, but to avoid putting Hong Kong at a competitive
disadvantage vis-a-vis other economies that have provided similar
guarantees. Singapore mirrored this logic in its release, noting
that while its banks remain "sound and resilient", "the announcement
by a few jurisdictions in the region of Government guarantees for
bank deposits has set off a dynamic that puts pressure on other
jurisdictions to respond or else risk disadvantaging and potentially
weakening their own financial institutions."
SINGAPORE 00001127 002 OF 004
5. (U) Analysts agreed with the MAS view that "Under the current
environment of heightened anxiety, one could not have ruled out a
shift of deposits to Hong Kong, especially those of high net worth
individuals with deposits well in excess of S$20,000. This would
have challenged SingaporeQs competitive position as an international
financial centre, and especially as a wealth management hub." After
Ireland announced its blanket deposit guarantee in early October,
the
United Kingdom (UK) and Australia, among others, followed with
broader coverage. (Note: two of Hong Kong's largest deposit-taking
banks, HSBC and Standard Chartered, are domiciled in the UK. These
two banks also have a large presence in Singapore and other
Southeast
Asian countries.)
-----------------------------------
Malaysia: Keeping Up With Singapore
-----------------------------------
6. (U) Also on the evening of October 16, Bank Negara Malaysia (BNM)
and the Malaysian Ministry of Finance announced that effective
immediately, all ringgit and foreign currency deposits with
commercial, Islamic and investment banks, and deposit taking
development financial institutions regulated by BNM, will be fully
guaranteed by the Government through Perbadanan Insurans Deposit
Malaysia (PIDM) until December 2010. The guarantee extends to all
domestic and locally incorporated foreign banking institutions.
(Note: BNM also extended access to its liquidity facilities to
insurance companies and takaful (Islamic insurance) operators that
it
regulates and supervises.)
7. (U) Kevin Chew, Senior Manager at PIDM, confirmed in a phone call
with econoff that regional considerations were the driving force
behind the change rather than any specific pressure. He insisted
that the move was just a preemptive measure because other countries
were doing it. They didnQt want jittery investors moving their
money
to another country where their deposits were guaranteed. Chew was
very skeptical about the possibility that these guarantees would
ever
need to be tapped. He described Malaysian banks as "very well
capitalized" and "flush with liquidity." He pointed to unchanged
inter-bank rates in Malaysia, unlike in Hong Kong and Singapore
where
higher rates signaled that banks were reluctant to lend to one
another.
---------------------------------------------
Indonesia: Fell Early, but May Need Even More
---------------------------------------------
8. (U) Indonesia was the first in the region to expand its deposit
insurance coverage in the wake of volatile interbank, currency and
equity markets. On October 13, Indonesia issued a presidential
decree in lieu of a law that allowed the Indonesia Deposit Insurance
Corporation to raise the deposit amount subject to government
guarantee from IDR 100 million (approximately $10,000) to IDR 2
billion (approximately $200,000) per depositor, per bank. The new
higher limit reportedly will completely insure 97 percent of
depositors, but only around 61 percent of total deposits by value.
(See reftels C and D for details of other actions taken to improve
liquidity in the Indonesian financial system.)
9. (SBU) On October 15, Indonesia also hiked the maximum interest
rate allowed on rupiah-denominated guaranteed deposits by 75 basis
points to 10 percent, citing a need to raise the attractiveness of
local currency deposits. The maximum guaranteed deposit rate for
foreign currency deposits remained at 3.5 percent. (Comment:
considering Indonesia's 12-percent inflation rate and pressure on
the
currency, it may take a higher insured deposit interest rate to
restore depositor confidence, especially when deposits in
SINGAPORE 00001127 003 OF 004
neighboring
countries such as Singapore are now fully government guaranteed.
Some banks have had to offer rates as high as 3 percent to attract
longer-term deposits in recent months. End comment.)
----------------------
Thailand safe, for now
----------------------
10. (U) Thailand has not joined its neighbors because it is still
operating under a blanket deposit guarantee introduced in 1997.
However, Thailand's Deposit Protection Agency Act (DPAA), effective
from August 2008, will replace the current blanket deposit guarantee
system over a four-year time frame (see reftel E). Specifically,
the
Thai government will continue to give a blanket guarantee of all
deposits in the first year, then cover 100 million baht
(approximately $2.9 million) per person per bank for the second
year,
50 million baht (approximately $1.5 million) for the third year, 20
million baht (approximately $483,000) for the fourth year and 1
million (approximately $29,000) in the fifth year.
10. (SBU) Commercial analysts estimate that while deposit accounts
of
1 million baht or less constitute 99 percent of all bank accounts in
number, they comprise only 26 percent of deposits by value. During
the four-year phase-in period, the bill grants the government the
authority to increase the insurance limits depending on prevailing
economic conditions. (Comment: Thailand may have to push back the
implementation of the DPAA so as to conform to the three-year time
frame during which other large depositors in the region will be
covered, or else risk capital flight to Singapore, Hong Kong or
Malaysian banks.)
--------------------------------
Few details on premium increases
--------------------------------
11. (U) Global best practice would require that any increase in
deposit coverage generally be funded by an increase in the premiums
charged to the banks benefitting from the guarantee. However, there
is a dearth of information on premium changes across Southeast Asia:
-- Singapore made no reference to increased premiums in its
statement.
-- Malaysia's Chew said that premiums for deposit insurance would go
up, but that PIDM had not yet "worked out the details" regarding how
much.
-- Indonesia has not yet made any public announcements about any
increase in premiums.
-- Thailand's DPA has also not yet finalized its premium schedule,
although market analysts expect it will remain at the same 40 basis
points of total deposits that banks were previously required to
contribute to the Financial Institutions Development Fund for at
least a few years. DPA officials told Finatt in August that they
would likely move to a more risk-based system after the DPA fund had
reached a comfortable size.
--------------------
Further moves ahead?
--------------------
12. (SBU) While all governments insist that their financial systems
are sound, they remain vigilant and may take further action if
necessary. For example, Bank Negara specifically announced on
October 16 that it stands ready to "guarantee interbank obligations
of banking institutions and facilitate efficient access to capital
for banking institutions to maintain capital adequacy at target
SINGAPORE 00001127 004 OF 004
levels well above the minimum standards." Malaysia's Chew noted
that
Bank Negara did not anticipate needing to so at this time. However,
"nobody can pin down a number," he told us, and "no one knows how
deep the recession in the U.S will go." Bank Negara will do it if
it
has to, he said.
--------------------------------------
Comment: Coordination will be required
--------------------------------------
13. (SBU) Southeast Asian countries clearly wish to avoid the
deposit
flight they experienced during the Asian Financial Crisis, when most
regional countries had no formal deposit insurance coverage. A
preemptive strategy is quite understandable, although some
coordination will be required to make the return to limited deposit
insurance in December 2010 problem-free. Noting that the
International Deposit Insurance Association convenes its annual
meetings in Washington at the end of October, Malaysia's Chew
observed that "weQll probably have a lot to talk about."