PM Lee Hsien Loong’s speech at the MAS50 Partners Appreciation Evening on Thursday, 7 October 2021.
Chairman and members of the MAS Board
Ladies and gentlemen
The Monetary Authority of Singapore (MAS) came into being 50 years ago. It was conceived as a dedicated organisation to carry out the specialised functions of central banking and financial regulation.
MAS’ responsibilities have expanded considerably since its inception, but its policy objectives remain the same. Low inflation, in support of sustained economic growth. Healthy official foreign reserves, a sound financial sector, resilient against shocks; and a vibrant international financial centre, adding value and creating jobs.
MAS has played a major role in Singapore’s economic and financial development. Its monetary policies and management of official reserves have sustained macroeconomic stability and confidence in Singapore. Its regulation and supervision of financial institutions have created a safe and internationally trusted financial system; and its development strategies have made the financial sector an engine of growth, attracting investments and creating many good jobs.
Key to this was MAS’ combination of caution and creativity: It adhered to sound economic principles, while creatively adapting policy frameworks to suit Singapore’s context. It set high regulatory and supervisory standards, while taking a facilitative and risk-proportionate approach. It ensured financial stability, while promoting innovation and seizing opportunities.
MAS did not achieve this alone. It shares credit for the success with the broader Singapore system within which MAS operates. It enjoys the political stability, healthy public finances, good public administration, and the rule of law. These all enabled MAS to pursue its objectives, single-mindedly and professionally. MAS also collaborated closely with the private sector, tapping on industry expertise, listening carefully to feedback, co-creating infrastructure and solutions, and jointly promoting the development of financial markets.
MAS’ approach of marrying caution with creativity, and its close cooperation with industry and public sector partners, has delivered economic and financial results for Singapore. Let me illustrate how this worked, in five key episodes spanning the last five decades: First, the launch in 1968 of the Asian Dollar Market. Second, the adoption in 1981 of an exchange rate-centred monetary policy framework. Third, the new approach from 1998 onwards to supervising and developing the financial sector. Fourth, the use of macroprudential measures from the late 2000s to stabilise the property market. And fifth, the decisive move since 2015 to become a Smart Financial Centre and leading FinTech hub.
The Asian Dollar Market
Let me start with Asian Dollar Market. Singapore did not emerge as an international financial centre by chance or natural evolution. We made it happen, starting with the Asian Dollar Market. This was a bold, creative and strategic initiative made possible through active collaboration among the government, the MAS and global industry players.
In 1968, Dr Albert Winsemius, who was then the chief economic advisor to the Singapore government, spoke with his friend, Mr J. D. van Oenen about potential opportunities for Singapore. Mr Van Oenen was the vice-president of the Bank of America branch in Singapore. Showing Winsemius a globe, he explained how Singapore occupied the gap in global trading hours between America and Europe, and therefore was well-placed to facilitate round-the-clock trading in currencies and securities. Mr Van Oenen wrote up a paper on the subject and sent it to Mr Hon Sui Sen. Mr Hon was then Finance Minister, and later he became the first Chairman of MAS. Mr Hon discussed the proposal with Prime Minister Mr Lee Kuan Yew. They decided it was a golden opportunity to develop Singapore as a financial centre, and seized it. Thus was born the Asian Dollar Market, to bridge the gap in global markets as well as to finance the growth of the region. The timing could not have been better. Asia was rapidly industrialising. Singapore seized the opportunity to channel global savings into investments in the region. And this was even before the birth of MAS.
Once MAS was created, it lost no time collaborating with the industry and with the Ministry of Finance (MOF) to promote the trading of foreign currencies out of Singapore. To prevent the flow of funds into the Asian Dollar Market from disrupting domestic monetary management, MAS created the Asian Currency Unit (ACU). This was a novel booking account, to allow banks to accept deposits and lend in non-Singapore dollars. MOF supported MAS by granting a concessionary tax rate of 10% on all offshore income earned by banks’ ACUs. Over the next decade, MAS gradually dismantled foreign exchange controls and widened the scope of ACU operations. Eventually, all exchange controls were eliminated, enabling residents and corporations in Singapore to transact in all currencies without limits.
The Asian Dollar Market earned Singapore a place on the global financial map. This was the spark that ignited Singapore’s growth as a regional and international financial centre. Today, with total assets in the Asian Dollar Market exceeding US$1.4 trillion, Singapore is the world’s third largest foreign exchange centre after London and New York.
Exchange rate-centred monetary policy
The second key episode was the adoption of an exchange rate-centred monetary policy. Initially, MAS managed monetary, credit, and exchange rate conditions through an eclectic toolbox of instruments, like interest rates, reserve ratios, credit ceilings, and even moral suasion. But this approach proved inadequate in the face of accelerating global inflation. MAS needed a fresh framework. At that time, monetarist thinking held sway – the world’s leading central banks were extolling the virtues of controlling money supply to tame inflation. But Dr Goh Keng Swee had very different ideas. Given Singapore’s small and open economy, he felt that the exchange rate was a more important anti-inflation instrument. In 1980, Dr Goh became MAS Chairman.
In 1981, MAS adopted an exchange rate-centred monetary policy framework. It was the first central bank in the world to do so. And till today, Singapore is the only country to explicitly use the exchange rate to control inflation. Our unconventional approach stemmed from a clear understanding of Singapore’s uniquely open economy, and the courage to depart from conventional thinking. But MAS also knew that allowing the Singapore Dollar to float freely risked destabilising the economy. Hence, MAS operated neither a free float nor a fixed peg, but a managed float. Our balanced approach has been labelled by economists as the BBC system – comprising a basket, band and crawl.
This approach has worked for us. It has ensured that the value of the Singapore Dollar against a basket of currencies appropriately reflected economic fundamentals, and Singaporeans have enjoyed over four decades of low and stable inflation.
This success also reflects the government’s ethos of fiscal prudence and long-term orientation. In many developing countries, monetary policy has been a hand¬maiden of lax fiscal policies. When their central banks print money to finance persistent budget deficits, the result has been high inflation and economic instability. Advanced countries have largely opted for central bank independence, to insulate monetary policy from political interference. This has its merits, but is not a panacea for all macroeconomic problems. Even independent central banks have been financing fiscal deficits so as to keep interest rates low. This enables government debts to keep growing, but in the long term, it risks financial instability.
Singapore has adopted a different approach. Our Constitution requires the government to keep a balanced budget over each term of office. The question of monetary financing does not arise. Prudent fiscal policy and a consistently healthy budget position has absolved MAS of the need to finance government spending, and allowed it to focus on its primary mission of price stability.
The relationship between MAS and MOF is neither cosy nor frosty. While MAS does not enjoy statutory independence, it has full autonomy over monetary policy, just as MOF has over fiscal policy. Yet, they consult each other closely in managing financial crises and ensuring overall economic stability, and because of that, we have an overall coherence across our monetary and fiscal policies, and that fosters economic and financial stability.
A new approach to developing and regulating the financial sector
The third key episode began in the late 1990s, when MAS launched a series of ground-breaking reforms in the way it supervised and developed the financial sector. From the beginning, MAS had taken a conservative stance towards regulating banks and financial institutions, which had served us well. But the world was changing, and the industry was changing too. Financial markets and fund flows were becoming increasingly globalised. Competition between financial institutions was growing more intense. New business models were gaining traction. Singapore risked falling behind in the face of advances in technology and banking practices. At the same time, new risks were emerging. Indiscriminate deregulation could easily have led to serious mishaps – as indeed happened elsewhere. It was time to shift gears.
But it was a very delicate shift to make. How to liberalise and promote competition and innovation, while safeguarding financial stability? In other words, how to become less cautious, but in a careful way? External conditions this time were not propitious. In 1998, the Asian Financial Crisis had just broken out. Financial systems across Asia were coming under severe strain and battening down the hatches, but our economy and financial system was sound, and so we decided to turn adversity into opportunity, and press ahead with our liberalisation programme in the teeth of the storm.
MAS planned and executed a series of careful steps. Individually, each step was carefully calibrated, but taken together, they made up a bold and coherent programme to comprehensively liberalise the financial sector. Retail banking was further opened up to foreign competition. In the insurance industry, limits on foreign shareholdings were removed. In stockbroking, fixed commissions were abolished and foreign players allowed free entry. The stock- and derivatives exchanges were demutualised and merged to form the Singapore Exchange (SGX).
In making this bold shift, MAS benefitted greatly from private sector insights and experience. Many creative ideas came from the Finance and Banking Competitiveness Sub-Committee (under MTI’s then Review Committee on Singapore’s Competitiveness). It was chaired by Mr Peter Seah, who was then CEO of Overseas Union Bank (OUB). I told Peter Seah’s committee: “if all your proposals are accepted, it probably means that you have not been radical enough”. And they did not disappoint!
MAS also updated the way it regulated and supervised financial institutions. It moved away from “one-size-fits-all” prescriptive regulation towards a more tailored supervisory approach. It required local institutions to build up their own risk management capabilities. In regulating capital markets, it shifted from a merit-based to a disclosure-based approach.
Even as MAS liberalised the financial sector, it made sure to maintain and improve a sound and effective regulatory framework. We kept bank capital requirements stricter than global minimum standards. We imposed bank liquidity requirements even before there were similar international standards. We made every major regulatory move in close consultation with the industry to ensure that it was progressive, risk proportionate, and responsive to the needs of the market.
These reforms paid off. Today, we are a vibrant international financial centre, anchored by a strong and competitive core of Singapore institutions, as well as foreign players deeply rooted in Singapore. Our financial system has also proved resilient. We safely rode out the 2008 Global Financial Crisis and more recently, the financial system has provided stability and support for our economy amid the COVID-19-induced recession.
Macroprudential measures for a sustainable property market
The fourth key development was MAS’ active intervention to ensure a stable and sustainable property market. This started in the late 2000s, right through till today. Ever since the 2008 Global Financial Crisis, global interest rates have been at historically low levels, as major central banks implemented extraordinary monetary easing to support economic recovery. But this has fuelled excessive risk-taking and yield-seeking financial flows into asset markets. In Singapore, the low interest rates and abundant liquidity made themselves strongly felt in rapid overheating of the residential property market.
MAS’ macroprudential response to these pressures was atypical of most central banks, on two counts. First, while most central banks solely focused on stabilising consumer prices, MAS proactively moderated fluctuations in private property prices. It took calibrated steps, spread over several iterations to avoid causing sharp market corrections. MAS intervened because of the systemic importance of the property market for the health of household balance sheets, as well as the banking system. Second, while most central banks eschew coordinated policy actions with other government agencies, MAS collaborated actively with MOF, the Ministry of National Development (MND) and Urban Redevelopment Authority (URA) in its macroprudential actions. This coordinated “whole-of-government” approach allowed the agencies to share property market data, surveillance insights, and analyses to form a holistic picture. It provided an effective suite of mutually reinforcing policy tools across these agencies. MAS imposed loan-to-value and total debt servicing limits. MOF imposed stamp duties on property purchases; and MND and URA implemented supply-side measures. These proved a potent combination in cooling and stabilising the property market, and in the process safeguarding financial stability.
Harnessing technology for a smart financial centre
The fifth key development was MAS’ move to make Singapore a smart financial centre.
The mid 2010s saw the advent of FinTech – non-financial players using technology to offer innovative financial services solutions. This development looked set to disrupt the financial industry. MAS knew that a Smart Nation also needed to be a Smart Financial Centre.
Hence, MAS was one of the earliest financial regulators globally to promote FinTech, and lay the foundations for a digitally advanced financial centre. But even as it welcomed innovation, MAS also made sure that regulations kept abreast of the risks. MAS launched a FinTech Regulatory Sandbox in 2016 to test new technologies and business models quickly, within specified boundaries, to avoid risks spilling over into the wider financial system. It provided early regulatory guidance on new areas such as cloud computing, robo-advisers and digital payment tokens, to allow these activities to flourish in a safe manner. It also issued mandatory requirements on basic cyber hygiene to all financial institutions to strengthen cyber resilience. None of this would have been possible without close partnership with the financial industry, FinTech community, with the institutes of higher learning, and of course, the rest of government. Among all of MAS’ strategic moves, this digitalisation journey was perhaps also its most collaborative.
This collaborative spirit underpinned MAS’ efforts to build up-to-date digital infrastructure. For instance, MAS worked closely with the banking industry to build FAST, a 24/7 real-time inter-bank fund transfer system. MAS and the banks then built PayNow on top of FAST. This made e-payments seamless. Now, anyone can pay anyone else using just a mobile number or unique business identifier. Fast and easy. MAS also partnered GovTech to expand the MyInfo service to the financial industry. Banks could remotely open accounts for their customers using government-verified personal data, while ensuring proper due diligence. Convenient, yet safe. Meanwhile, MAS continued to take an open approach towards new players and operating models. It granted non-traditional payment service providers access to FAST. It issued licenses to digital-only banks, to add value, diversity and choice to the financial sector and economy. It experimented with blockchain-based cross-border payment and settlement systems, in collaboration with several financial institutions, tech partners and other central banks.
Thanks to MAS and its partners, Singapore is today a leading global FinTech hub, home to more than 40 innovation labs belonging to global financial institutions and 1,400 FinTech firms.
The future – partnership and collaboration more relevant than ever
These five examples from MAS’s history highlight its brand of creativity and caution. Looking ahead, we see emerging disruptive technologies such as artificial intelligence, blockchain, and the internet of things. New business models such as decentralised finance and the use of crypto assets; as well as climate change and the transition to a low-carbon economy. MAS will again need the optimal blend of creativity and caution as it deals with these challenges, and creates new opportunities for our financial sector and economy.
These examples also remind us that behind MAS’ success lies a story of partnership and trust, forged with the industry and stakeholders over 50 years. This partnership and trust will become more critical and relevant than ever. It is therefore fitting that, to celebrate its half century, MAS is showing appreciation for key partners who have worked alongside it all these years. You have been a huge part of MAS’ success. Thank you very much! Let me also dedicate MAS’ success to the hard work and professionalism of the generations of leaders and staff who have served with dedication and distinction. You have done the public service proud!
The journey ahead will be as challenging as ever. But I am confident that the MAS team, together with support from our industry, will continue to deliver on its mission faithfully and successfully.
Congratulations, MAS, on your 50th anniversary! Thank you very much!
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