Stable banking model--Singapore way

With the massive global credit crunch, UK seems to be moving towards nationalising their banks while US stubbornly clings on to their privately owned banks (though publicly listed). A few years ago, China ‘liberates’ her nationalised banks into the arms of the world’s private owners.

Just over the few years, we witness the wild changing fortunes of banks. Despite the heavy losses and in fact, bankrupt banks, the US remains convinced that the model of privately controlled banks will still be the most efficient in performing its roles of facilitating the economic activities of the country. US still believe Adam Smith’s “invisible hand’ of market forces works best in allocating resources, including the banking system. US is doubtful of government management of banks as political entanglements, lack of direct accountability and personal drives will compromise the bank’s effectiveness and performance.

Given the current credit crunch, UK may be forced to nationalised the banks so as to push out the loans to the businesses. Most businesses depend on certain level of liquidity (or credit support) for their working capital to function, otherwise, they will bucket under its own financial exposure. Privately owned, the bank’s managers and owners are very ‘afraid’ to extend loans to most businesses in current climate, given the high uncertainty of businesses viability across the board. When fear of business’ failures (and the extended loans) feeds on itself, it will create greater fear and even more likely to turn it into reality.

The twin devils of private and public management failure of banks seem to be a Catch-22 situation when the global economy traps itself into the corner by allowing the global banks to run amok with a total lack of accountability.

Beside the successful current MAS supervision and regulatory structure for the banks, Singapore used to have an specially created successful banking feature in the form of Development Bank of Singapore (and Post Office Saving Bank can be considered as a sister arm), fully owned by the government but operate like private entities. These two banks can be seen as one as it will still serve its purpose, that is, to provide a stable banking environment for the country’s growing economy. The government direct control of the bank allows it to guide the overall banking practices in the country through its presence and competition in the banking environment. With special emphasis for development, the bank had played an effective role of funding projects that at times, the privately owned banks avoided, especially, when the risk seems high on project basis though the returns may be even higher. The returns in the form of economic growth, stability and positive externalities that a country need, are sometimes can only be undertaken by such a bank. Such a bank will be able to offer supposedly ‘risky’ loans for great returns, and thus, pushes the privately owned banks to either catch up or be left behind.

In a way, a government owned bank (runs as a private company) will serve a function similar to the NTUC supermarket chain. It helps to stabilise the prices and practices in the period of uncertainty while still maintaining a viable banking business model. Given the great economic uncertainty, government may have to consider putting in place such a bank to serve Singapore, especially in such tumultuous time, as the global severe credit crunch tide will reach our shores soon. In fact, the major economies should also consider Singapore banking model in overcoming their current banking paralysis.