Published November 4, 2009

Why banks take the expensive subsidiary route

Confidentiality and MAS as regulator are among reasons

By SIOW LI SEN

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(SINGAPORE) Many foreign-owned banks, especially private banks, are set up here as subsidiaries with local incorporation - a fact that is not widely known outside the industry.

Mr Isenring: Says VP Bank went for a subsidiary model as 'it enables clients to enjoy the highest amount of confidentiality - not secrecy - but the right to privacy'

The decision to either incorporate locally or operate as a branch depends on the business model, said consultants.

The branch of a foreign bank can piggyback on the larger capital base of its group head office.

Although incorporating locally is more expensive, reasons cited for taking the subsidiary model include confidentiality, the tax angle and having the Monetary Authority of Singapore (MAS) as home regulator.

Indeed, the recent financial crisis has bolstered Singapore's reputation as a sound financial centre.

According to Deloitte Singapore, one year on from the global financial meltdown, Singapore has come through with its reputation enhanced.

Deloitte cites two measures: The recently released Financial Development Report 2009 issued by the World Economic Forum that moved Singapore from 10th position to fourth spot.

Singapore also fared well by taking fifth position in the index on financial stability, compared with Britain at 37th and the United States' 38th.

'Based on our observation and discussions with clients and prospects, we noted that there is a growing interest to set up private banking operations in Singapore,' said Deloitte.

'There are several plus points to operating in Singapore,' said Ho Kok Yong, Deloitte Singapore partner, global financial services industry group.

These are largely due to the stable financial system and the pragmatic approach of MAS in regulating various financial institutions, he said.

But local incorporation as a subsidiary can be expensive. For a full bank licence, the paid-up capital is $1.5 billion - which US Citigroup forked out when it decided to take the subsidiary route for Citibank Singapore in January 2005.

The minimum capital requirement is considerably less for the more restricted wholesale bank ($100 million) and merchant bank ($3 million) licences.

Though the capital requirement for merchant banks is under review and could be revised upwards, BT understands.

While local incorporation is more expensive, for banks that have big plans in the region, this becomes less of a factor.

'Putting aside the capital requirements, it can be attractive to set up a banking subsidiary in Singapore,' said Winston Ngan, head of financial services, Ernst & Young.

As a Singapore-incorporated company, a bank enjoys benefits from the tax treaties that Singapore has signed with a wide range of countries, he says.

'Also, a full banking licence enables a bank to provide a wider range of banking services than the licences granted to a branch or a merchant bank.

'If the bank plans to use Singapore as its Asian hub, with sizeable business and asset base, the relatively higher capital hurdle required for incorporating a local bank compared with a branch or merchant bank becomes less of an issue.'

Low Boon Hon, director, global financial services industry group at Deloitte Singapore, said foreign-owned private banks new to the region initially set up with a lower capital base to test the market.

'They will likely set up shops here in Singapore initially with a relatively lower capital base and confirm the viability of their business models against the already competitive private banking industry here,' he said.

'Over time, the banks may take other matters, such as tax into consideration, before deciding on a stable operating model,' said Mr Low.

Singapore's reputation as a financial centre with a well-known regulatory framework and rule of law is a strong draw.

OCBC Bank, when announcing its purchase of ING Asia Private Bank last month, cited the latter having MAS as its home regulator a plus factor.

Last year, when Liechtenstein-based VP Bank set up in Singapore, it had to decide whether to go for the branch or subsidiary approach.

'We went for a subsidiary model,' says Reto Isenring, managing director of VP Bank (Singapore). 'It enables clients to enjoy the highest amount of confidentiality - not secrecy - but the right to privacy.'

As a locally incorporated bank, not even VP Bank's head office can have access to its customers, he says. 'We're liable and report directly to MAS.'