CENTRAL BANKING IN SINGAPORE

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CENTRAL BANKING IN SINGAPORE
The Role of MAS
MAS Seminar for Pre-University Economics
Teachers, 22 Sep 1999 Economics
Department Monetary Authority of Singapore
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A SHORT HISTORY OF CENTRAL BANKING
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THE EARLY CENTRAL BANKS

• The Riksbank of Sweden
• 1668
• The Bank of England
• The Old Lady of Threadneedle Street
• 1694

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IN THE BEGINNING

• Central banking not clearly defined
• Gradual evolution over time
• Began with function of financing the government
  in return for privilege of note issue
• Central bank functions standardized over time

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TODAY...

• Central Bank gt Apex of Monetary and Banking
  System
• Own code of rules and practices
• The Science of Central Banking
• The Art of Central Banking

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MILESTONES IN MONETARY HISTORY
1929-1931 Great Depression
1944 Bretton Woods Agreement
Early 1920s Restoration of Gold Standard
1973 Final Break-down of Bretton Woods
1914 Unofficial Suspension of Gold Standard
1971 Nixon closes Gold Window
1931 UK leaves Gold Standard
Gold
Interwar
Bretton Woods
Floating
1944 - 1973 Adjustable peg Gold price fixed at
US35/ounce All countries declared par value in
US
1973 - Present Floating rates Uncoordinated
system Volatility in exchange rates
1914 - 1945 Suspension of Gold Standard Interwar
Gold Standard plagued by financial crises
1870s - 1914 Currency values fixed in terms of
gold Supported by credibility and cooperation
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MILESTONES IN MONETARY HISTORY
1929-1931 Great Depression
1944 Bretton Woods Agreement
Early 1920s Restoration of Gold Standard
1973 Final Break-down of Bretton Woods
1914 Unofficial Suspension of Gold Standard
1931 UK leaves Gold Standard
1971 Nixon closes Gold Window
1931 Straits Settlements also leaves Gold
Standard (Straits convertible to Sterling)
1973 CIA terminated S floats
Early 80s Exchange Rate-centred Monetary Policy
1906 Spore adopts Gold Standard (Straits 60 7
Gold Sovereigns)
1967 Currency Split BCCS set up
1972 S re-pegged to US
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THE MONETARY AUTHORITY OF SINGAPORE

• Established under the MAS Act 1970
• Commenced operation on 1 Jan 1971
• Prior to this, various central banking functions
  carried out by several government departments and
  agencies

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OUR MISSION

• To promote sustained non-inflationary economic
  growth, and a sound and progressive financial
  centre

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OUR MAIN FUNCTIONS

• Management of Monetary Policy
• Banker and Financial Agent of the Government
• Banker to Financial Institutions
• Regulation Supervision of Financial Sector
• Promotion Development of Financial Sector

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ISSUE OF CURRENCY
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RIGHT OF CURRENCY ISSUE

• Associated with origin and development of CBs
• Need for uniformity of currency notes
• Need for credit control with increasing use of
  deposit money created by commercial banks
• Need for regulation of note issue

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CURRENCY ISSUE IN SINGAPORE?

• Board of Commissioners of Currency, Singapore
  (BCCS)
• Currency Act
• gt 100 foreign asset-backing of S
• A true currency board?

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MONETARY POLICY
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ISSUES IN MONETARY POLICY

• AIM?
• Price Stability, Output Growth, Balance of
  Payments Equilibrium
• INSTRUMENT?
• Reserve Requirements, Open Market Operations,
  Discount Rate, Foreign Exchange
  Intervention/Swaps
• INTERMEDIATE TARGET?
• Interest Rates, Monetary Base, Exchange Rate

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MONETARY POLICY IN SINGAPORE

• AIM
• Low inflation for sustained economic growth
• INTERMEDIATE TARGET
• Trade-weighted exchange rate
• INSTRUMENT
• Foreign exchange intervention, forex swaps,
  lending to and borrowing from banks, purchase and
  repurchase of government securities for liquidity
  management

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HISTORY OF MONETARY POLICY IN SINGAPORE

• Before 1970s
• - S peg to Sterling at S7.3469 per
• 1972
• - Sterling came under speculative attack
  resulting in eventual floating in June
• - Singapore switched to US peg
• 1973
• - Major devaluation of US in Feb
• - Collapse of Bretton Woods system of fixed
  exchange rates
• - S floated

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HISTORY OF MONETARY POLICY IN SINGAPORE

• 1974-75
• - Stagflation
• - Use of credit ceilings to curb inflation
• 1976-79
• - Lifting of all exchange control
• - Shift from direct controls towards money market
  operations to influence liquidity monetary
  conditions
• Since 1981
• - Exchange rate centred monetary policy

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BANKER TO THE GOVERNMENT
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BANKER TO THE GOVERNMENT

• Banking and Agency Services to Government
• Financing of the Government
• debt issuance
• Tension between Macroeconomic Objectives and
  Financing Government

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BANKER FINANCIAL AGENT OF GOVERNMENT

• Issuance of government securities
• Provision of current account and deposit
  facilities to government
• Management of Singapores official foreign
  reserves

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BANKER TO FINANCIAL INSTITUTIONS
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BANKER TO FINANCIAL INSTITUTIONS

• Payments or Settlement System
• Systemic Risk?
• Real Time Gross Settlement System (RTGS)

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BANKER TO FINANCIAL INSTITUTIONS

• Banks maintain current account balance with MAS
  to
• satisfy reserve requirements (MCB)
• settle net balances among banks arising from
  centralised cheque clearing
• MAS Electronic Payment System (MEPS)

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REGULATION SUPERVISON OF FINANCIAL SECTOR
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REGULATION SUPERVISION OF FINANCIAL INSTITUTIONS

• Guard against systemic risk to financial sector
• Ensure that financial institutions are sound
• gt Regulation
• Ensure compliance with laws and guidelines
• gt Supervision

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REGULATOR AND SUPERVISOR OF FINANCIAL SECTOR

• REGULATOR
• Prudential Rules and Guidelines
• Banking Act, Insurance Act, etc
• Reserve Requirements

• SUPERVISOR
• Review of financial accounts
• On-site inspection
• External internal auditors

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NEW APPROACH TO REGULATION SUPERVISION

• Shift from Regulation to Supervision
• Focus on Systemic Risk
• Promote Greater Disclosure
• Make Rules Transparent
• Preserve High Prudential and Supervisory Standards

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DEVELOPMENT OF FINANCIAL SECTOR
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DEVELOPMENT OF FINANCIAL SECTOR

• Excessive regulation can hamper growth
• Need to balance prudential role with
  developmental role
• gt Walking the tight rope

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PROMOTER AND DEVELOPER OF FINANCIAL SECTOR

• Asian Dollar Market
• Foreign Exchange Market
• SIMEX
• Electronic banking, loan syndication, bond
  issuance, fund management, international
  securities trading

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MORE PROACTIVE ROLE IN PROMOTION
Consultation
Proactive Promotion
Strategic Approach
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MAS VISION FOR SINGAPORE
TO BE A WORLD CLASS FINANCIAL CENTRE
full service provider in capital and money
markets
regional hub for retail and wholesale financial
services
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Asset Management/ Private Banking To be the
premier international asset mgmt centre in Asia
A WORLD CLASS FINANCIAL CENTRE
Debt Capital Market To be the leading
international debt hub in Asia
Equity Derivatives Exchange To develop a
world-class exchange for equities and derivatives
trading with a pre-eminent position in Asia
Treasury To be among top 3 global hubs for
foreign-exchange trading
Banking To be the commercial banking centre for
Asia
Insurance To be the premier insurance centre in
Asia
Personal Financial Services To be a remote
financial services hub for Asia
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CHALLENGES AHEAD
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SOME KEY CHALLENGES

• Challenges posed by
• Global integration of financial markets
• Asset Price Inflation

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GLOBALISATION OF FINANCIAL MARKETS

• Need for better regulation and supervision
• Need for greater cross-border supervisory
  co-operation

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ASSET PRICE INFLATION
Should monetary policy address asset price
inflation? Opposing views

• Asset prices provide information about future
  price levels
• Risk of asset bubble bursting
• Difficulty of assessing asset prices
• Differences in magnitude speed of adjustment in
  goods and asset prices

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THE END