MAS' approach of 'caution with creativity', industry cooperation key to 50 years of success: PM Lee

EMERGING disruptive technologies, new business models and climate change present both challenges and opportunities for Singapore's financial sector and economy, and the Monetary Authority of Singapore (MAS) will again need an "optimal blend of creativity and caution" as it deals with these, Prime Minister Lee Hsien Loong said on Thursday.

"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," Mr Lee said at the MAS' 50th Anniversary Partners Appreciation Evening to commemorate the 50th anniversary of Singapore's central bank.

Over the last 50 years, MAS' approach of marrying caution with creativity, as well as its close cooperation with industry and public-sector partners is what has delivered economic and financial results for Singapore, and this is what MAS will again need as it deals with challenges and opportunities ahead.

"Behind MAS' success lies a story of partnership and trust, forged with the industry and stakeholders over the last 50 years. This partnership and trust will become more critical and relevant than ever," said Mr Lee.

He outlined five key episodes over the last five decades that have helped the MAS achieve its policy objectives:

The first was the launch of the Asian Dollar Market in 1968 to bridge the gap in global trading hours between the United States and Europe, and to finance the growth of the region.

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"The timing couldn't have been better. Asia was rapidly industrialising, Singapore seized the opportunity to channel global savings into investments in the region," he said.

Although this was before the creation of MAS, the central bank "lost no time" collaborating with the industry and with the Ministry of Finance (MOF) to promote the trading of foreign currencies out of Singapore.

"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," said Mr Lee.

With total assets in the Asian Dollar Market exceeding US$1.4 trillion, Singapore is now the world's third largest foreign exchange centre after London and New York.

The second key episode was the adoption of an exchange rate-centred monetary policy in 1981, a year after Singapore's first finance minister Goh Keng Swee became MAS chairman, said Mr Lee.

While MAS initially managed monetary, credit and exchange-rate conditions through a tool box of instruments, such as interest rates, reserve ratios, credit ceilings and "even moral suasion", said Mr Lee, this approach proved inadequate in the face of accelerating global inflation.

While the monetarist thinking held sway at the time, Dr Goh had very different ideas, believing that the exchange rate was a more important anti-inflation instrument.

Mr Lee said: "It was the first central bank in the world to do so. Till today, Singapore is the only country to explicitly use the exchange rate to manage inflation.

"Our unconventional approach stemmed from a clear understanding of Singapore's uniquely open economy, and the courage to depart from conventional monetary policy."

This unconventional approach has worked for Singapore, and its success reflects the government's ethos of fiscal prudence and long-term orientation, he said.

For many developing countries, monetary policy has been a "handmaiden of lax fiscal policies", while advance countries have largely opted for central bank independence to insulate monetary policy from political interference, said Mr Lee.

Singapore has adopted a different approach, he noted. "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 from the need to finance government spending, and allowed it to focus on its primary mission of price stability," he said.

The relationship between MAS and MOF is "neither cosy nor frosty", but one where 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," he said.

The third key episode began in the late 90s, when MAS launched a series of reforms in the way it supervised and developed the financial sector. While it had taken a conservative stance from the beginning, the world was changing, with financial markets becoming increasingly globalised and competition between financial institutions, intense, he said.

At the same time, the Asian Financial Crisis had just broken out and financial systems across Asia were coming under severe strain.

"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," he said.

It opened up retail banking to foreign competition and removed limits on foreign shareholdings in the insurance industry among others.

It also updated the way it regulated and supervised financial institutions, moving away from a "one-size-fits-all" prescriptive regulation towards a more tailored supervisory approach.

But even as it liberalised the financial sector, it made sure to maintain and improve a sound and effective regulatory framework, said Mr Lee.

These reforms paid off, he said, making Singapore a vibrant international financial centre, while keeping its financial system resilient, helping the economy ride out the 2008 Global Financial Crisis.

The fourth key development was MAS' active intervention to ensure a stable and sustainable property market. MAS' macroprudential response to the overheating of the residential property market was atypical of most central banks, Mr Lee said.

"MAS intervened because of the systemic importance of the property market for the health of household balance sheets and the banking system," he said.

At the same time, its coordinated policy actions with other government agencies proved a "potent combination" in cooling and stabilising the property market, helping to safeguard financial stability.

The fifth key episode was MAS' move to make Singapore a smart financial centre, amid the emergence of fintech. The central bank was one of the earliest financial regulators globally to promote fintech and lay the foundations for a digitally advanced financial centre, he said. But none of this would be possible without close partnership with the financial industry, fintech community, institutes of higher learning and the government.

"Among all of MAS' strategic moves, this digitalisation journey was perhaps also its most collaborative," he said. For example, its collaboration with the banking industry built real-time inter-bank fund transfer system FAST, which led to PayNow, making e-payments seamless.

Meanwhile, MAS continued to take an open approach towards new players and operating models, granting non-traditional service providers access to FAST even as it issued licences to digital-only 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," said Mr Lee.

Echoing the importance of partnership, MAS managing director Ravi Menon said in an earlier speech that the relationship MAS has with the industry is special, especially in a world where many regulators are “aloof at best, and hostile at worst” when dealing with the industry.

“To be sure, we are a no-nonsense supervisor, not averse to setting high prudential standards, imposing tough remedial measures, and occasionally shutting down a bank or two. But MAS has always believed that working with the industry, rather than against it, is the best way to achieve our shared objectives: keeping the system safe and growing the business,” he said.

On Thursday evening, MAS launched a commemorate book, Resilience, Dynamism, Trust: 50 Landmark Statements By MAS Leaders, a compendium of key speeches and statements by MAS leaders over the past 50 years.

It traces the development of MAS policies and strategies as a central bank, integrated financial regulator and promoter of Singapore as an international financial centre.

Another book, A History Of Money In Singapore, will be launched at a Golden Jubilee Conference to be held on Nov 2-3. This event which will bring eminent central bankers and academics together for discussions on monetary policy financial stability and central banking in Asia.

The book presents an account of Singapore's currency and monetary history from pre-colonial times to the present.