By Fiona Chan

THE Government may not have to use much - if any at all - of the $150 billion it has set aside to guarantee bank deposits in Singapore, said Minister of Trade and Industry Lim Hng Kiang yesterday.

But Mr Lim said the blanket guarantee the Monetary Authority of Singapore (MAS) issued last week was necessary to keep local banks competitive and to prevent a flight of deposits overseas.

MAS announced last Thursday that it would guarantee all the bank deposits of individuals and corporates here with immediate effect until the end of 2010.

This amounts to about $700 billion in Singapore dollar and foreign currency deposits in banks, finance companies and merchant banks, Mr Lim said yesterday in a ministerial statement in Parliament.

His statement on the Government's decision to guarantee deposits followed a series of questions from 10 MPs on the fallout from the global financial crisis.

In his statement, Mr Lim said the move to guarantee deposits is backed by $150 billion in Government reserves.

This should be 'more than sufficient' because it is unlikely the guarantee will be needed at all, given the robustness of Singapore's banking system, said Mr Lim, who is also MAS deputy chairman.

'For the guarantee to be called, two things have to happen: a bank has to fail, and at the same time its assets must be worth so little there is not even enough to repay its depositors,' he said.

Since banks here are sound and closely supervised, there is little likelihood of them failing owing to problems in Singapore. Even if one fails, it should have enough assets to pay depositors, who have priority in being paid, he explained.

'The $150 billion backing is an amount that will be ample to meet any eventuality except the most remote,' he said, adding the amount 'does not in any way reflect an estimate of the likely draw over the two years of the guarantee'.

'On the contrary, we expect the actual draw to be small or, if we are fortunate, even zero.'

Still, the Government had to give the guarantee to ensure 'a level international playing field for banks in Singapore'.

Bank guarantees given earlier by regional governments such as Australia and Hong Kong had 'set off a dynamic' that put pressure on other economies to do the same or else risk disadvantaging their own financial institutions, he said.

'If Singapore had not introduced a similar guarantee, there was a real risk that depositors would have shifted some of their deposits out of Singapore banks, to banks in other jurisdictions which guarantee deposits,' Mr Lim added.

The guarantee also bolsters the public's confidence, helps Singapore's financial services sector function normally and contributes to restoring confidence in the global financial system, he explained.

As for worries that financial institutions will abuse this guarantee by expanding aggressively and taking on excessive risks, the MAS has stressed to them the need to remain prudent, Mr Lim said.

Even with $150 billion set aside, MAS will have 'ample means, with the full backing of our not insignificant reserves' to defend the Singdollar if needed.

The potential impact on the reserves is low, he added. 'Singapore's financial system remains sound and we are well- placed to meet the challenges facing us.'

The other issue that dominated yesterday's sitting was a constitutional amendment to let the Government spend more of the investment returns on reserves. Parliament will continue the debate today.

This article was first published in The Straits Times on October 21, 2008.