COSTING OF FUNDS : LOCAL BANKS VERSUS FOREIGN BANKS

Abstract

This academic exercise seeks to study the costing of funds by commercial banks in the context of Singapore. A quick overview of the banking sector is conducted, followed by a detailed examination of the existing reserve requirements imposed by the Monetary Authority of Singapore. The discussion includes arguments pertaining to the need for statutory requirements, a proposal to modify the current requirements and lagged reserve accounting. Upon establishing the need for reserves requirements, the effective cost of funds is carefully distinguished with the nominal cost of funds by means of a representative formula for effective-cost-of-funds computation. The attributes of a good costing approach are elaborated, while possible pitfalls in its computation are also highlighted. A comparison is made between local and foreign banks in terms of cost-competitiveness, based on the representative formula discussed earlier. Other aspects of competitiveness in the domestic retail-banking front will also be looked into. Various policy recommendations are raised with regard to reserve requirements, cost of funds and competitiveness between local and foreign banks.