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."