Singapore Central Bank Takes Wary Approach On Internet Banking

But the number of electronic banks (e-banks) is not expected to jump sharply anytime soon given the de facto central bank's stringent guidelines, analysts said.

"The key principle driving this approach is that while the establishment of Internet banks is being encouraged, the authorities wish to see such banks being set up based on a sound business model, and not to destabilize the industry by non-prudent or aggressively competitive behavior," Salomon Smith Barney wrote in a report.

"It's a prudent way of allowing e-banks to start without causing instability in the banking system," said Lim Jit Soon, head of Singapore research at the U.S. investment house.

Under the regulatory framework, e-banks set up by Singapore-incorporated banking groups would be subject to the same minimum capital adequacy ratio (CAR) requirement as that for traditional banks, currently set at 12%.

Also, an e-bank set up by a locally incorporated bank must have a minimum paid-up capital of $100 million Singapore ($57.47 million U.S.). Should an e-bank be jointly set up with a foreign bank, the local bank must have a controlling stake, the MAS said.

Maintaining a strict regulatory framework is the overriding priority, the MAS said, but it kept the door open on future policy adjustments as technologies and the banking environment evolve. "Our supervisory approach towards Internet banking will have to evolve as the technologies and business strategies in banking themselves keep changing," said MAS deputy managing director Tharman Shanmugaratnam.

He added the central bank "wants to maintain prudent regulatory oversight so as to preserve public confidence in the financial system, while encouraging financial institutions to take full advantage of new technologies to improve efficiency and competitiveness."

Risk considerations inherent in Internet banking "are not new or fundamentally different" from those facing other forms of banking, the central bank said. "MAS will therefore subject Internet banking, including IOBs (Internet-only banks), to the same prudential standards as traditional banking," it said.

Some analysts said the guidelines would discourage the rapid development of e-banks in the city-state. David Lum, a senior investment analyst at Daiwa Institute of Research, described the 100-million-dollar capital requirement as "prohibitive" and the 12% CAR irrelevant. "It is doubtful whether any foreign Internet-only bank would bother to set up such a bank in Singapore under these terms," he said. "So these guidelines would only seem attractive for Singapore banks conditioned for ages in a high capital regime," he added.

Oversea-Chinese Banking Corp. (OCBC) has by far been the most aggressive among the five local banks in its e-bank strategy. The bank has formed an equal joint-venture cyberbank with Australian and New Zealand Banking Group, and has its own standalone e-bank called finatiQ.

Salomon Smith Barney said the regulatory framework could affect OCBC's venture with the Australian bank, which was established before the MAS announcement. DBS Banking Group, the country's largest, prefers to view the Internet as an extension of its current range of products and services offered, analysts said