Is it time to have a central depository for cash?

I REFER to the Wealth & Investing commentary by Ferlyn Tan headlined "The long-awaited comeback of the Singapore banks" (BT, Jan 6, 2021) which asserted that Singapore's banking sector is still attractive as the global economy and credit environment have largely improved from the Covid-19 shock. The author also does not expect any substantial compression in margins in 2021, especially when the three local banks are flush with liquidity, as deposits have outpaced loan growth over the past few quarters.

As the Covid-19 global pandemic drags on, banks have turned risk averse and cut back on lending, unless the government shares in the lending risks and/or guarantees a significant portion of the loans. The banks seem to have the best of both worlds, when they can price the loans based on borrower risks, while hedged against bad loans from the government should those loan defaults occur.

The profitability of a bank is determined by its net interest margin (NIM), which is the difference between what it earns from loans and what it pays on deposits. Even though the NIM of the local banks are under 2 per cent, the three local banks are making billions of dollars each quarter. Banks are paying peanuts to depositors for the cost of funds to finance higher-yielding loans, and continue to report impressive return on equity and pay billions in dividends to shareholders, Covid-19 notwithstanding

For a long time, depositors have been getting the low end of the stick, receiving meagre interest while banks deploy their savings for lucrative lending and other investments. But in the event of a major catastrophe, banks are considered too large to fail, and as happened in the United States, the government has to use taxpayer monies to bail them out. This archaic model that benefits banks at the expense of depositors should be revamped.

Long gone are the days when physical cash need to be stored in the banks, so banks have outlived their safe-storage utility. Digital currency in the future may even wipe out the already shrinking physical money supply in the economy. So instead of banks taking deposits and making loans, should we create a central depository for cash, similar to what we have for securities, whereby banks will deposit the cash with the central bank? These deposits will no longer be in the books of the banks. The central bank can pay higher interest rates than the banks, just like our CPF Board. For their lending activities, banks can borrow from the Monetary Authority of Singapore (MAS) or the inter-bank market.

When hard times call for the government to boost lending, MAS can reduce the interest rate it charges the banks or work out a NIM sharing with the banks. Currently, the spread between the bank's prime lending rate and the average fixed deposit rates is incredibly wide. Banks are the best credit risk assessors, and they should continue to perform that role. But depositors deserve better compensation than that under the current arrangement.

To supplement their revenue, banks can always grow their fee income from non-lending activities such as wealth management, credit cards, investment banking and financial advisory services. With this decoupling of savings and loans, governments and the public no longer need to worry about bank runs and banking collapse affecting depositors' hard-earned monies. Maybe the time is ripe for a transformational change in banking.

Ee Teck Siew