Time to raise deposit insurance cap of S$75,000; count SRS funds threshold separately from ordinary deposits

SILICON Valley Bank’s (SVB) failure has shone the spotlight on deposit insurance, which is capped at US$250,000 in the United States – where SVB is located. In Singapore, deposit insurance is capped at S$75,000.

The cap covers Singapore dollar-denominated deposits in savings, current and fixed deposit accounts as well as Supplementary Retirement Scheme (SRS) funds – all adding up to S$75,000 per depositor per financial institution (FI), which includes finance companies.

Although depositors would want to have all their savings insured in the event of a bank failure, prohibitive insurance costs and moral hazard make blanket protection unlikely.

Nonetheless, raising the ceiling to S$100,000 or higher, as well as separating coverage for SRS funds, may now be necessary as income – and savings – have risen over the years.

Deposit insurance’s primary objective is to protect small depositors, whom the government recognised may be less able to make informed decisions and yet most affected by a bank failure. When the threshold was raised to S$50,000 in 2011, from S$20,000, over 90 per cent of depositors were fully covered.

By 2018, when the cap was last reviewed, the S$50,000 fully covered only 87 per cent of insured depositors. Hence, the figure was adjusted upwards to the present threshold. It fully insures about 90 per cent of depositors covered, in line with guidance from the International Association of Deposit Insurers, a Monetary Authority of Singapore (MAS) spokesperson said.

“In setting the coverage limit, MAS balances the need to provide adequate protection to small depositors while limiting the cost to participating FIs. The higher the insurance coverage, the higher the cost will be to participating FIs, which may be passed on to depositors.

Amid market volatility, investors stay on the sidelines and keep their financial firepower in cash. Yet, financial institutions or market confidence might be most vulnerable at this time – as the recent bank failures in the West have shown.

The average income from work per household member (among resident employed households, and in nominal terms) rose between 5.3 per cent and 15.6 per cent in 2022. After adjusting for inflation, households in the bottom 90 per cent saw real income increase between 1.1 per cent and 10.1 per cent. Only those in the top 10 per cent posted a real income decline of 1.3 per cent.

Median monthly income from work, including employer Central Provident Fund (CPF) contributions, for full-time employed residents was S$5,070. That works out to a take-home pay of about S$3,200, for those with a 20 per cent CPF employee contribution rate in 2022.

Financial advisers typically recommend setting aside at least six months of expenses for a rainy-day fund. Assuming one is prudent and has squirrelled away six months of salary, that would be at least S$20,000 each for 50 per cent of the workforce.

The risk-averse who shun the financial markets and the elderly near or in retirement might have more savings. Many people also typically have accounts with only one or two financial institutions – to qualify for higher interest rates, as well as for practical reasons.

Savings also increased while borders were closed in the pandemic years. Statistics from MAS show total deposits and balances of non-bank customers (meaning customers that are not financial institutions) within the banking system rose from S$1.5 trillion in July 2021 to S$1.7 trillion in January 2023. (Earlier data is not available following changes to MAS calculations.)

It is possible, therefore, that a sizeable number have savings of over S$75,000. That threshold also counts SRS balance, which then makes it easily breached.

The reasons the government gave in 2010 for including SRS money towards the aggregate coverage limit were that “SRS is a voluntary savings scheme”, the fund did not form the core savings of depositors, and the amounts held were not significant, so separate coverage was not necessary.

But it might be time for this stance to change.

SRS funds, including any investment gains, generally cannot be withdrawn before one reaches the statutory retirement age, and contributors can hold only one account.

It is in fact an offence with penalties to open SRS accounts with more than one operator.

It is therefore not a case where SRS contributors could split their balances up for placements with several financial institutions.

Although SRS funds can be invested, seniors near or in retirement have always been advised not to take on too much financial risk. This means they may have their SRS funds sitting as deposits waiting to be drawn down over 10 years beginning from the statutory retirement age.

Assuming one parks S$5,000 a year in SRS, the individual would have S$50,000 in 10 years. This leaves a coverage of only S$25,000 for other deposits, or S$100,000 over 20 years, and no protection for other deposits, under the current cap.

It was reported that a significant 25 per cent of total SRS contributions of S$14.4 billion, or S$3.4 billion, were left idle as at end-December 2021.

Local financial institutions are said to be tightly regulated and therefore relatively safe. It should therefore cost less to insure deposits, since default risks are low.

A recent client note from DBS Group Research had one insightful takeaway from the recent bank run: In a crisis triggered by news and share price uncertainty, ordinary depositors do not stop to read what a bank’s CET1 (Common Equity Tier 1), LCR (liquidity coverage ratio) or NSFR (net stable funding ratio) metrics are. Only the certainty of deposit insurance can effectively curb risks of a deposit flight.