By SIOW LI SEN
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WITH recession confirmed, it's going to be a long gloomy ride for shareholders of the three local banks - the closest proxies to the economy. A Citi report dramatically titled Sell Banks: Entering the Bear Market End Game noted that with a deep recession in the United States, it is probably inevitable that the Singapore economy will undergo a deeper and more severe recession.
'Based on previous estimates from Oxford Economic Forecasting, every one per cent point fall in US GDP growth should reduce Singapore's GDP growth by 1.7 per cent,' said Citi.
Even those banking on the integrated resorts (IRs) to help bolster the faltering property market which the local banks are heavily exposed to may get a jolt if one of the key investors gets into trouble from the credit crunch.
Talk of delays in the construction of the IRs because of the escalating cost of materials has been rife.
The global credit crunch has also weighed on one of its key players, Las Vegas Sands, which - like other US corporates - has found it harder to secure funding lines. It was reported on Forbes.com that the Sands chief executive bought his company's convertible debt to avoid violating lenders' covenants in the third quarter. However, there remain further funding needs for Sands projects in Macau, while business in Las Vegas is unsurprisingly feeling the effects of the US consumer slowdown.
'At the start of 2008, Sands raised over $5 billion for the Marina Bay Sands project. All three local banks were part of the then syndicate, but we do not know what their current exposure may be to this deal,' said Citi.
Still, some may see a silver lining from last Thursday's announcement that the Singapore government is now guaranteeing all deposits - thereby removing all doubt, if any existed, about the stability of our banking system.
But an unintended consequence could be that the three local banks (DBS Group Holdings, United Overseas Bank and OCBC Bank) would get penalised when depositors decamp with their savings to foreign banks which normally offer higher interest rates.
Nikhilesh Bhattacharyya, associate economist with Moody's Economy.com, asked if the blanket deposit guarantees would be looked back on as prudent behaviour by governments?
He said: 'The long-term effects of the moves by authorities will only be known well into the future. Many respected commentators in the US have warned of the moral hazard dangers associated with offering a blanket guarantee on bank deposits.
'With governments now assuring individuals and businesses that their funds are safe regardless of the bank they choose, the incentive to check the viability and stability of a bank is effectively reduced to almost zero.
'This could have implications for the way banks behave in the future and increases the importance of regulators in ensuring financial institutions are behaving in a prudent manner,' Mr Bhattacharyya said.
The Monetary Authority of Singapore (MAS) did warn banks not to misuse the guarantee by taking on risky activities.
Observers also think there is a small risk of leakage to foreign banks offering higher interest rates. After all, the local banks have a natural dominance with their very large branch network.
Inertia and extreme risk aversion might still discourage investors from shifting funds to banks with the highest interest rates, said Chua Hak Bin, Citigroup analyst.
And MAS will watch like a hawk over banks to make sure they do not exploit the guarantee.
After all, the idea of the guarantee was to ensure a level playing field for all banks operating here.
'MAS will also likely be taking on a more vigilant role to ensure that financial institutions do not embark on a competitive bidding war for deposits, exploiting the deposit guarantee,' said Dr Chua.
It looks like MAS could be the only one in town to be adding headcount during the next few years as its regulatory role just snowballed. Ex-MAS staff who left for more lucrative jobs at the banks may now be making a beeline for their former employer.
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