Singapore: Implementing Quantitative Balancing (QB)

 

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Why?

Reasons : Singapore has a highly efficient and technologically advanced financial sector, making it an excellent candidate for piloting QB. The country's strong regulatory framework and focus on innovation would facilitate the implementation of QB. Additionally, Singapore has a vested interest in maintaining financial stability and transparency, especially given its role as a global financial hub.

Potential Impact : QB could enhance transparency in Singapore's banking sector, while also providing additional revenue for public services and infrastructure projects.

Localizing Quantitative Balancing (QB) for Singapore involves adapting the proposed reforms to align with Singapore's legal, regulatory, and financial frameworks. Singapore's robust financial sector, strong regulatory environment, and commitment to transparency make it an ideal candidate for implementing QB. Below are the suggested amendments and changes to key legislation and regulations, along with a detailed implementation plan.

1. **Amendments to the Monetary Authority of Singapore Act (MAS Act)

The MAS Act governs the operations of the Monetary Authority of Singapore (MAS), which acts as the central bank and financial regulator. To implement QB, the following amendments should be made:

1.1 Explicit Recording of Money Creation

• Proposed Amendment : Require MAS to explicitly record the creation of money (e.g., through lending or purchases of government bonds) in its cash flow statements.
• Legal Basis : Amend Section 25 of the MAS Act to mandate this transparency.
• Textual Amendment :

  Section 25 (Recording of Money Creation) :
  "The Monetary Authority of Singapore shall explicitly record the creation of new money through lending or purchases of government bonds in its cash flow statements. This recording shall include the corresponding seigniorage liability to the Singapore State Treasury."

1.2 Harmonization with International Standards

• Proposed Amendment : Align MAS practices with international accounting standards like IFRS-IAS 7.6 and US-GAAP ASC 942-230-20.
• Legal Basis : Amend Section 30 of the MAS Act to ensure harmonization.
• Textual Amendment :

  Section 30 (Harmonization with International Standards) :
  "The Monetary Authority of Singapore shall harmonize its accounting practices with international standards, including IFRS-IAS 7.6 and US-GAAP ASC 942-230-20, to ensure consistency in reporting cash flows and liabilities."

2. **Amendments to the Singapore Banking Act (Banking Act 1970)

The Banking Act governs the operation of banks in Singapore. To implement QB, the following amendments should be made:

2.1 Segregation of Deposits

• Proposed Amendment : Mandate banks to segregate customer deposits from their own balance sheets, ensuring that deposited funds are not used for speculative activities.
• Legal Basis : Amend Section 14 of the Banking Act to require strict segregation of deposits.
• Textual Amendment :

  Section 14 (Segregation of Deposits) :
  "Banks shall maintain separate accounts for customer deposits and their own balance sheets. Deposited funds shall not be used for speculative activities or included in the bank's balance sheet. Banks shall report changes in deposits to the Singapore State Treasury."

2.2 Capital Adequacy Rules

• Proposed Amendment : Exclude deposits from Common Equity Tier 1 (CET1) calculations, reflecting their status as segregated funds.
• Legal Basis : Amend Section 27 of the Banking Act to adjust capital adequacy rules.
• Textual Amendment :

  Section 27 (Capital Adequacy Rules) :
  "For the purposes of calculating Common Equity Tier 1 (CET1) capital, banks shall exclude customer deposits from their balance sheets. Deposits shall be treated as liabilities to the Singapore State Treasury and not as part of the bank's equity."

3. **Amendments to the Singapore Civil Code (Cap. 44)

To ensure that the legal framework supports the principles of QB, the following changes should be made:

3.1 Ownership of Deposits

• Proposed Amendment : Clarify that depositors retain full ownership of their funds, with banks acting solely as custodians.
• Legal Basis : Amend Section 103 of the Civil Code to explicitly state this.
• Textual Amendment :

  Section 103 (Ownership of Deposits) :
  "Where a person deposits money with a bank, the ownership of the deposited money remains with the depositor. The bank acts as a custodian of the deposited funds and is obligated to return the funds to the depositor upon request. The bank shall not use the deposited funds for its own purposes or as part of its balance sheet."

3.2 Liability to the State Treasury

• Proposed Amendment : Require banks to record a liability to the Singapore State Treasury equal to the nominal value of newly created deposits.
• Legal Basis : Insert a new section (e.g., Section 103A) to mandate this reclassification.
• Textual Amendment :

  Section 103A (Liability to the State Treasury) :
  "When a bank creates a new deposit through lending or other activities, the bank shall simultaneously record a liability to the Singapore State Treasury in an amount equal to the nominal value of the deposit. This liability represents the seigniorage benefit derived from the creation of new money."

4. **Amendments to the Public Finance Act (Cap. 269)

The Public Finance Act governs the national budget and fiscal policy. To implement QB, the following amendments should be made:

4.1 Incorporation of Seigniorage Revenue

• Proposed Amendment : Introduce a dedicated line item for "Credit from Monetary Seigniorage" in the State's cash flow statement.
• Legal Basis : Insert a new section (e.g., Section 15A) to explicitly recognize seigniorage revenue.
• Textual Amendment :

  Section 15A (Credit from Monetary Seigniorage) :
  "The Singapore State Treasury shall record seigniorage revenue derived from the creation of new money as a separate line item in the State's cash flow statement. This revenue shall be used for public purposes, including debt reduction and social programs."

5. **Amendments to the Consumer Protection Act (Cap. 393)

The Consumer Protection Act protects consumers and ensures fair trading practices. To implement QB, the following amendments should be made:

5.1 Deposit Protection

• Proposed Amendment : Introduce explicit protections for depositors, ensuring that their funds are fully backed by the State Treasury.
• Legal Basis : Amend Section 13 of the Consumer Protection Act to provide additional protections.
• Textual Amendment :

  Section 13 (Deposit Protection) :
  "Depositors have the right to expect that their funds are fully backed by the Singapore State Treasury. In the event of a bank failure, the State Treasury shall ensure the return of deposited funds to the depositor."

6. Transition Plan

To ensure a smooth transition to QB, a phased implementation plan should be developed:

6.1 Phase 1: Pilot Program

• Action : Select a few banks to participate in a pilot program to test the feasibility of QB.
• Duration : 1-2 years.
• Objective : Gather data and refine the implementation process.

6.2 Phase 2: Full Implementation

• Action : Roll out QB to all banks in Singapore.
• Duration : 3-5 years.
• Objective : Ensure that all banks are compliant with the new regulations.

6.3 Phase 3: Continuous Monitoring and Adjustment

• Action : Establish a monitoring committee to oversee the implementation of QB and make adjustments as necessary.
• Duration : Ongoing.
• Objective : Ensure that the system remains stable and transparent.

7. Public Communication and Education

To build trust and ensure broad support for QB, the following steps should be taken:

7.1 Public Awareness Campaigns

• Action : Launch campaigns to educate the public and stakeholders about the benefits of QB, emphasizing transparency, financial stability, and depositor protection.
• Objective : Build public support and ensure that all stakeholders understand the changes.

7.2 Stakeholder Engagement

• Action : Engage policymakers, regulators, and industry leaders in the planning process to ensure buy-in and support.
• Objective : Foster collaboration and ensure that all stakeholders are aligned.

8. Case Study: Hypothetical Example of a Bank Under QB in Singapore

To illustrate the practical application of QB in Singapore, consider the following hypothetical example:

Scenario: "Delta Bank" in Singapore

• Traditional Accounting :

  • Balance Sheet :
    • Assets : Loans (SGD 10 million)
    • Liabilities : Deposits (SGD 10 million)
  • Cash Flow Statement :
    • Operating Activities : Net Cash from Operations (SGD 1 million)
    • Investing Activities : Loan Disbursements (SGD 10 million)
    • Financing Activities : Increase in Deposits (SGD 10 million)

• Quantitative Balancing (QB) :

  • Balance Sheet :
    • Assets : Loans (SGD 10 million)
    • Liabilities : Due to State Treasury (SGD 10 million) (representing the seigniorage liability)
  • Cash Flow Statement :
    • Operating Activities : Net Cash from Operations (SGD 1 million) – Seigniorage Payment (SGD 100,000) = Net Operating Cash Flow (SGD 900,000)
    • Investing Activities : Loan Disbursements (SGD 10 million)
    • Financing Activities : Change in Due to State Treasury (SGD 10 million)

Analysis:

• Transparency : QB clearly separates the bank's core lending activities from the monetary policy function (seigniorage). The seigniorage payment (SGD 100,000, assuming a 1% rate) is explicitly shown as an operating expense, providing a more accurate picture of the bank's profitability.
• Nash Equilibrium :
  • Bank : Lends responsibly (SGD 10 million), accurately reports the loan and the corresponding change in "Due to State Treasury," and pays the due seigniorage, maximizing profit within the QB framework.
  • State : Records the "Due to State Treasury" as an asset (e.g., "Credit from Bank Seigniorage") and uses the seigniorage revenue (SGD 100,000) for public purposes. The State also oversees the bank's activities.
  • Depositors : Maintain their deposits, trusting that their funds are secure and that the system is transparent, backed by the State.
• Stable Outcome : This scenario represents a Nash Equilibrium. No player has an incentive to deviate. The bank cannot increase lending excessively without regulatory scrutiny. The State cannot overcharge seigniorage without harming the bank's lending activity (and its seigniorage revenue). Depositors are incentivized to keep their money in the bank due to the transparency and security afforded by QB.

Conclusion

Implementing Quantitative Balancing (QB) in Singapore would require a series of regulatory and legal reforms, focusing on reclassifying deposits, explicitly recognizing seigniorage, enhancing transparency, and ensuring financial stability. By carefully managing the transition and engaging stakeholders, Singapore can establish a more transparent and resilient banking system, aligning with the principles of QB.