The Asian Currency Market: Singapore as a Regional Financial Center
Author: Zoran Hodjera





The creation of the Asian currency market in Singapore occurred in the period when a number of offshore financial centers, such as those in the Caribbean area, were set up as intermediaries between several national capital markets and the rapidly growing Eurocurrency market. The authorities in these centers provided inducements to banks and other financial institutions, through various fiscal incentives that reduced costs of operations and through abolishing restrictions on nonresidents’ transactions in foreign currencies. In most cases, the activity of offshore markets is limited to a straightforward intermediation between a major neighboring industrial country that restricts international movements of capital and the Eurocurrency market.

The Asian currency market provides an intermediation function between several Asian countries and the Eurocurrency market. However, soon after its creation in 1968, the Asian market went beyond this function and has now developed a substantial regional network of financial transactions. It provides an arbitrage function between markets in Asia, the Middle East, and Europe; it serves as a major avenue for channeling funds into development projects in many Asian countries; and it also serves as an efficient channel for mobilizing these countries’ surplus funds and for placing them elsewhere in the region.

The Asian currency market was developed when the economy of Singapore was going through an important period of transition that was caused by the independence of the island in the mid-1960s and by a rapid phasing out of large British military installations. In addition to an important effort of economic development at home, this period of transition has involved expanding financial and trade relations to countries other than the British Commonwealth and the immediate neighbors. The creation of the Asian currency market can be seen as a part of this transition. Since the market’s inception, the long-run strategy of the authorities has been to stimulate the development in Singapore of a large financial sector, based on very highly skilled services to be provided to the whole south and east Asian region. Besides contributing to the real income of the island, this growing sector was expected to help to increase the financial resources of Singapore and to attract a host of related economic activities.

This article examines the role of the Asian currency market as a regional financial center. Section I discusses the development of the market and its operations, while Section II discusses the relationship of the Asian market to other international markets and its contribution to Singapore’s real income. Section III presents the conclusion.

I. Development of the Market

Several factors contributed to the establishment of the Asian currency market in Singapore. In the 1960s the rapid economic growth of a number of Asian countries, an increased flow of direct investment, and a greater participation of multinational corporations in the economy of Asia generated a growing pool of foreign currencies in the hands of the private sector. Widening of the Indo-Chinese war in the second half of the 1960s increased foreign exchange expenditures in the region, mostly in U.S. dollars. Thus, when a tightening of credit conditions in the United States in 1967-68 contributed to a rising trend in interest rates in the Eurodollar market, tapping the existing dollar balances in the Asia-Pacific region became attractive for major international banks, particularly for those from the United States. Furthermore, many banks were looking for a site for regional offices from which they would service the increasing number of their branches in the region.

The willingness of the Singapore Government to provide the incentives necessary for attracting international banking business was the key to the development of an international financial center on the island. Although Tokyo and Hong Kong already had highly developed banking systems, Tokyo’s financial market was not open to international transactions of the type practiced in the Eurocurrency market, because such transactions were severely constrained by Japan’s exchange control regulations of capital flows. Hong Kong had no restrictions on international capital movements, but a 15 per cent withholding tax on interest income from transactions by nonresidents discouraged its use as an international banking center.


The Asian currency market was instituted in 1968 when Singapore authorities licensed a branch of the Bank of America to set up a special international department to handle transactions of nonresidents.1 Regulations governing such transactions2 that were issued by the authorities were intended to stimulate further entries in the offshore banking. To separate transactions with nonresidents from local and foreign business conducted for residents of Singapore, all banks that were granted licenses were required to set up a special accounting unit for nonresident transactions, named the Asian currency unit (ACU).3

The authorities exempted ACU transactions from exchange controls4 and provided a number of fiscal and banking incentives. The most important of these incentives was the abolition in 1968 of the 10 per cent withholding tax on interest income from nonresident foreign currency5 deposits. In the following years, several stamp and estate duties on negotiable paper in foreign currencies and a tax on income from Asian currency bonds were also abolished. In 1972 the Monetary Authority of Singapore abolished the 20 per cent minimum reserve requirements against deposit liabilities in foreign currencies that the banks operating ACU accounts had hitherto been required to hold. The measure was particularly important, since it permitted an increase in earnings from offshore credit. In 1973 the corporate tax on net income from offshore lending and other offshore activities was reduced from 40 per cent to 10 per cent.

Singapore’s offshore operations are regulated by the Monetary Authority of Singapore, which also regulates the country’s banking system and administers its exchange controls. The Monetary Authority has been very conscious of the requirement for quality in the operations of this newly developed financial market and has been very selective in granting ACU licenses. The Banking Act of 1970 has permitted foreign commercial banks to set up branches, rather than subsidiaries, so that the risk of insolvency has been passed on to the banks’ head offices. Furthermore, in applying for licenses to operate ACU accounts, the head offices have had to provide the Authority with an undertaking to make up for any shortfall in liquidity suffered by their ACU branches in Singapore.

The general aim of the Monetary Authority has been to limit access to the Asian currency market to well-established foreign and domestic banks of medium to large size.6 A further aim of the Authority has been to protect Singapore from an excessive opening of banks operating in the domestic money market, which could crowd out small purely local banks operating on a modest capital base. Since the creation of the Asian currency market, licenses for an entire range of domestic and foreign banking operations have not been granted to foreign banks. Only 13 foreign commercial banks that were established prior to 1970 were fully licensed.7 Between 1971 and 1973, only “restricted licenses” were given to new entrants authorizing them to practice a full range of ACU operations, but limiting them in their operation in the local money market. The foreign banks with restricted licenses cannot operate more than one branch in Singapore, cannot offer residents savings account services, and cannot accept from residents deposits of less than S$250,000; but they can grant local currency loans to residents without restrictions. Since 1973 only “offshore banking licenses” have been granted to foreign banks. These banks are permitted to receive local funds only through the interbank market, and the deposits they can accept cannot be less than S$250,000. Their local lending is also restricted; they can grant residents only medium-term to long-term loans, the minimum amount being S$l million. Furthermore, their local lending is subject to the approval of the Monetary Authority. Therefore, the policy of the Monetary Authority has been to progressively limit new foreign banks to those areas of local business in which their operations are complementary to, rather than competitive with, the operations of the local and fully licensed banks.

Another category of foreign banks operating in the Asian currency market are merchant banks. Although they are not regulated by the Banking Act,8 these banks are subject to the supervision of the Monetary Authority. Merchant banks derive their earnings from financing various commercial and industrial activities, and from operating as underwriters, corporate advisors, and investment managers. Their access to local funds is limited to deposits from commercial banks and finance companies. Those merchant banks that are licensed to operate in the Asian currency market are particularly active in loan syndication, and in the flotation of Asian bonds and other international bonds.

Initially the exchange control regulations did not permit participation of residents in the Asian currency market. However, these restrictions have been substantially relaxed over the years. Residents have been permitted to borrow foreign currencies from the ACU banks for export finance and for other export-related transactions. Individual residents and corporations are permitted to hold limited foreign currency deposits on the ACU account.9 Insurance companies, pension funds, and provident societies are permitted to hold up to 10 per cent of their assets on that account.

In evaluating the participation of Singapore residents in the Asian currency market, one should take into consideration peculiarities of the exchange control regulations. While payments and capital transfers between Singapore residents and countries other than those belonging to the post-World War II sterling area have been subject to exchange controls, payments and transfers between residents and postwar sterling area countries have not been subject to controls. Under such conditions, a lively triangular arbitrage has been established between Singapore and international capital markets via Hong Kong, which has no exchange controls on payments and capital transfers. This large loop-hole in Singapore’s exchange control system made a natural candidate of Hong Kong for financial intermediation between Singapore and the countries outside the sterling area. However, since Hong Kong has a withholding tax of 15 per cent on interest income from nonresident transactions in foreign currencies, with an elimination of such a tax on transactions by the ACU banks in Singapore, this intermediation has been switched to the Asian currency market, but the ease with which residents can bypass exchange controls on non-sterling area currencies has also increased.

Another difference between Singapore and Hong Kong in the fiscal treatment of foreign banks’ offshore transactions involves net income from foreign currency lending abroad, which includes syndication and other similar ventures. While there is no tax on such income in Hong Kong, in Singapore the tax rate was 40 per cent prior to August 1973 and has been 10 per cent since then. It is, therefore, in the interest of foreign banks having branches in both financial centers to maximize earnings from deposits in Singapore and earnings from offshore lending in Hong Kong.


The incentives provided by the Government of Singapore permitted a vigorous expansion of foreign currency transactions in this relatively small capital market (Table 1). The number of banks participating in the market grew from 11 at the end 1969 to 69 by the end of 1976;10 the size of the market grew from US$123 million to US$17 billion,11 which amounted to an average annual growth rate of 75 per cent, two and a half times the average growth rate of the Eurocurrency market. However, following the difficulties of some Eurocurrency banks in 1974 and the recession in 1975, the increased caution in granting credit has caused a significant deceleration of the Asian currency market growth.

In the period 1968 to 1970, when credit conditions in the United States were quite tight and U.S. banks were borrowing Eurodollars heavily, the activity of banks operating in the Asian currency market consisted of gathering dollar deposits and placing them in London and Tokyo. As a result of these operations, deposits of the nonbank sector exceeded two thirds of ACU banks’ total liabilities (Table 1), while loans to the nonbank sector were less than 5 per cent of total assets. Since the second half of 1970, with an easing of the credit tightness in the United States and in international capital markets, and with new banks entering the Asian currency market, interbank transactions have become by far the most important activity. Although deposits of the nonbanking sector grew substantially in size, their proportion of the ACU banks’ total liabilities fell to 15-18 per cent. Loans to the nonbank sector, however, increased faster than the total assets of the banks, reflecting the opening up of business opportunities in the region. Since 1973 the ratio of interbank transactions to total transactions in the Asian currency market has become roughly similar to the ratio in the Eurocurrency market. Singapore has become the most important international clearing market for interbank transactions of a large network of banks in south and east Asia and a major source of funds in the region for business investments and government borrowing.

Table 1.

Asian Currency Market: Number of ACU Banks and Their Assets AND Liabilities, December 1968-December 1976

(In millions of U.S. dollars)

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Sources: Monetary Authority of Singapore and its Quarterly Bulletin, various issues.

Total assets and liabilities include those of Singapore residents; therefore, as accounting identities, they are necessarily equal.

In addition to the commercial banks, suppliers of funds to the Asian currency market are nonbank companies, central banks, some government organizations, and individuals residing outside Singapore. Among the nonbank companies the most important are multinational corporations and major enterprises in the Asian region. Prior to the 1974 liberalization of U.S. constraints on direct investment flows, U.S. multinational corporations with branches in Asia were bypassing controls by using “swap arrangements” with banks in the Asian currency market.12 Corporations would make short-term deposits with ACU banks; in turn, these deposits would be borrowed by branches in the Asian region. Since 1974, the multinational and regional companies have continued to place their working capital and other liquid assets in the market. Deposits by central banks are not very large; with the accumulation of surplus funds in the Middle East, deposits by government statutory bodies and semigovernmental institutions from that region have become fairly large. Among nonresident individuals, deposits by members of the Chinese community are also significant.

The borrowers other than banks are prime name enterprises in the region, such as large regional and national companies and some smaller enterprises with first-class standing. More recently, governments and government agencies have also appeared as important users of Asian currency funds. Multinational corporations, on the other hand, have a preference for local currency financing of their medium-term needs, which minimizes the exchange rate risk; their borrowing on the Asian currency market has been mostly short term, for working capital needs.13

Singapore banks appear to be more selective than the Eurocurrency banks in granting credit. Such caution is in part germane to a higher risk of lending to government and enterprises in less developed countries; in part, this caution reflects the policy of head offices that have provided an explicit guaranty of solvency and liquidity of their ACU branches. Also, this caution reflects at least in part a fairly close supervision of ACU banks by the Monetary Authority. Credit is granted preferably to borrowers in the countries with convertible currencies; for a borrower residing in a country that practices exchange controls, special approval from his authorities is needed to certify that he will be able to obtain the foreign exchange necessary for meeting his repayment obligations.

Geographical breakdown of sources and uses of funds in the Asian currency market distinguish three major regional groupings (Table 2): Asia, including Australia; Europe; and others, including the United States, the Middle East, and Latin America. The Asian region used to supply about 50 per cent of deposits in the market. With an increased flow of funds from the Middle East in recent years, this percentage has fallen somewhat. Lending to the Asian region by ACU banks, however, has always exceeded 80 per cent of total lending, with borrowers situated in Indonesia, Hong Kong, Malaysia, the Philippines, the Republic of China, Korea, and Thailand. Developed countries in the region have also borrowed in the Asian currency market; however, they have preferred to float Eurobonds at fixed interest rates, compared with syndicated loans from the banks at floating interest rates.

Thus, throughout the operation of the Asian currency market, the Asian region has been a net user of funds, while Europe and the rest of the world have been net sources. In June 1976, net claims by ACU banks on the Asian region exceeded US$5 billion. Therefore the market has efficiently fulfilled its role as an intermediary, channeling the funds from major capital markets into a large number of developing countries in Asia.


The U.S. dollar is by far the most important currency used in the market. Since the early years, about 85-90 per cent of ACU banks’ assets and liabilities have been denominated in U.S. dollars, which reflects the importance of the dollar in the Asian region as a vehicle currency for trade and financial transactions. The dependence on the U.S. dollar also reflects the competitive edge that U.S. banks have in the region, because of their extensive network of branches in Asia. According to tentative estimates provided by a bank in Singapore, 46 per cent of total syndicated credit in 1975 was arranged and taken up by U.S. banks.14 The dependence on the dollar has increased with the generalized floating of major currencies. Since 1972, 92-95 per cent of assets and liabilities has been denominated in U.S. dollars.15

Table 2.

Asian Currency Market: Geographical Distribution of External Liabilities AND Claims of ACU Banks in Foreign Currencies, June 1971-JUNE 1976

(In millions of U.S. dollars)

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Sources: Monetary Authority of Singapore and its Quarterly Bulletin, various issues.

Includes Australia.

Deposit and loan facilities offered in the Asian currency market are similar to those offered in the Eurocurrency market.16 Deposits accepted are (a) sight; (b) two-day to seven-day notice, generally limited to US$100,000 or higher; and (c) deposits with fixed-term maturities of up to five years. Contrary to the practice of the Eurocurrency banks, the banks in Singapore accept small fixed-term and time deposits, the amounts sometimes being as low as US$5,000.

Loan facilities offered are (a) short-term, including overnight; (b) fixed-interest rate loans for various maturities that in recent years have often exceeded one year; (c) lines of credit for commercial transactions, for a fixed term but subject to a rollover; and (d) floating interest rate credits for some loans exceeding three years on which the interest rate, based on the interbank offer rate plus a margin, is adjusted every 3 to 6 months.

As in the Eurocurrency market, the increase in oil prices in 1974 has resulted in a radical modification of the maturity structure of ACU banks’ deposits and loans. It can be seen from Table 3 that ACU banks carefully matched the maturities of their claims and liabilities prior to 1974. This was largely so because unlike in a domestic monetary system credit creation is slight and leakages are substantial in international capital transactions in which ACU banks are operating. Furthermore, the large majority of ACU banks’ sight and short-term deposits is drawn from other banks. Prior to 1974, the largest amount of claims and liabilities was concentrated in the range between 3 and 12 months. Small net liabilities in the range of eight days to one year were used to finance net claims in the range exceeding one year. However, transactions with terms exceeding one year were an exception rather than a rule.

Table 3.

ACU Banks: Maturities of Claims and Liabilities and the Net Position, December 1970-December 19761

(In millions of U.S. dollars)

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Sources: Monetary Authority of Singapore and its Quarterly Bulletin, various issues.

Maturity classification was by original maturity through the first quarter of 1976; thereafter, by outstanding period to maturity.

Until the second quarter of 1976, total assets included only balances and fixed deposits with banks, and loans and advances to banks and nonbanks. Foreign notes and coins, Treasury bills, public securities and other securities, fixed assets, and all other assets held by ACUs were excluded. Total liabilities included only balances held for banks, fixed deposits from banks, and amounts borrowed from banks and other creditors. All other liabilities were excluded. From the second quarter of 1976, all assets and liabilities are included.

Outstanding maturities of more than three years are as follows:

Since 1974, banks of the Asian currency market have participated in the activity of major financial centers to recycle surplus funds of the oil producing countries. The activity resulted in important modifications of the maturity structure of ACU banks’ assets and liabilities. The preference of the OPEC countries for very short-term deposits was reflected in substantial increases in banks’ liabilities with maturities of three months or less between 1973 and 1976.17 On the other hand, a very large increase in demand for medium-term to long-term loans has been reflected in a manifold increase of claims with maturities exceeding one year. ACU banks showed a remarkable flexibility in adjusting to changes in the maturity structure of their assets and liabilities, despite the fact that these changes occurred in a period of unprecedented strains on the international payments system. As in the Eurocurrency market, the techniques used included: (a) loan syndication to spread default risk; (b) rollover clauses on short-term deposits to minimize withdrawal risk; (c) stand-by lines of credit with other banks to buffet the effect of possible liquidity difficulties; and (d) floating interest rates on long-term loans to minimize the probability that deposit rate fluctuation may make them unprofitable. The revival of the Asian bond issues also served to increase the flow of funds for long-term financing.

Nevertheless, banks operating in the Asian currency market have handled the recycling problem with somewhat greater caution than the other financial centers. This caution has been reflected in efforts by the banks to shorten the maturity of loans granted for less than one year, in order to improve the balance with the maturity of their liabilities. This caution was further reflected in a significant deceleration of the growth of the market in 1975 and 1976. Also, the share of loans in excess of one year has been smaller than in the Eurocurrency market.18 Despite this cautious approach, the Asian currency market has played an important role in contributing to the financing of payments deficits of a number of countries in the region.


The syndication of banks, for the purpose of handling larger loans on terms exceeding two years, has become more prevalent in Singapore in recent years. Data on flow of syndicated loans are not complete, but it appears that most of these loans were granted to borrowers from the Pacific region, including Brunei, Hong Kong, Indonesia, Korea, and the Philippines. Loans are mostly for development purposes, among which exploration for oil, production of oil and natural gas, and investment in manufacturing are the most prevalent. The maturities of syndicated loans have-been three to seven years, with floating interest rates and premia over comparable interbank offer rates varying from ¾ to 1¾ percentage points. In general, ACU banks have been lead managers, agents, or comanagers of loans floated in Singapore. They have also participated in syndication of loans placed simultaneously on several markets.

From the beginning, one of the main objectives of the Singapore authorities has been to stimulate issues of international bonds, called Asian bonds, as an integral part of the Asian currency market activity. To stimulate the issue of these bonds, the Government of Singapore floated its own international bond issue in 1972 and influenced two domestic banks to do the same. This attempt was not successful on the whole, mainly because it occurred on the eve of a sharp two-year upward trend in interest rates in the Asian currency market (Chart 1), as well as in other international markets, that discouraged flotation of bonds. Furthermore, the secondary market for such assets still did not exist in Singapore. The bond market remained dormant for several years. However, with a substantial decline in interest rates in international markets in 1975, the flurry of new international bond issues in Europe also stimulated the Asian bond market into activity. In the second half of 1975, three new issues were floated in the market, while in 1976, nine new issues totaling US$273 million were floated. A new investment instrument appeared in 1976 in the form of a note issue of US$25 million with a floating interest rate. Borrowers outside the Asian region also appeared in the market.19 Japanese security companies were very active as lead managers and participants in syndicates underwriting these issues. The maturity of bonds issued ranged between 7 and 10 years; only the 1972 bond issues of the Singapore Government and of the Singapore banks were for 15 years.

Chart 1
Chart 1

Singapore: Maturity Structure of ACU Banks’ Bid Rates on Deposits, 1971-February 1977

(In per cent per annum)

Citation: IMF Staff Papers 1978, 002; 10.5089/9781451946826.024.A001

Sources: ACU banks’ dollar interest rates: Straits Times, and Robert F. Emery; Eurodollar notes: Economic Group of the Chase Manhattan Bank.

Several brokerage houses that came to Singapore in the early 1970s contributed substantially to the development of the secondary market for international bonds and for other paper issued by the ACU banks. Improved conditions in the secondary market helped considerably in achieving a wider acceptability for new international bond issues. Nevertheless, bond issues are still limited in Singapore, which suggests that the size of its international market is still modest for efficiently conducting such operations.

II. Integration with World Markets and Contribution to Singapore


Singapore has an important time advantage in conducting arbitrage between financial centers in the Pacific region and Europe. The difference in time zones between Sydney, Tokyo, Hong Kong, the Middle East, and Western Europe, on the one hand, and Singapore, on the other hand, is such as to permit banks in the Asian currency market to conduct business with all these financial centers during a normal business day. This also means that Singapore quotations can serve as a basis for determining interest rates on international transactions in all financial centers east of the Mediterranean, before the start of the business day in London or Frankfurt.

London is the single most important market influencing interest rates quoted by the ACU banks, so that the levels and the structure of interest rates in the Asian currency market correspond closely to the level and the structure of Eurodollar rates in London. As a result of the tightening of credit in the United States and in international capital markets, there was a steep increase in interest rates between the second half of 1972 and the middle of 1974 (Chart 1). The ensuing decline in interest rates moderated in 1975 and 1976, but the differentials between the rates across the maturity scale widened and increased the possibility for gains by the banks through maturity transformation. These differentials narrowed again in 1977.

In the determination of interest rates in the market, ACU banks in Singapore use the London interbank rate quotation of the preceding day as a basis. This rate is often modified by interest rate developments in New York and San Francisco after the closing of the London market. With the opening of the Singapore market, the next day, ACU banks proceed gradually with interest arbitrage on dollar transactions with banks from Sydney and Tokyo to Beirut. With the opening of the London market at 3:30 p.m. Singapore time, the two markets merge, and ACU banks adjust their interest rates to correspond to the opening quotation in London. However, since major changes in Eurodollar rates in London occur later in the day when the New York market is also open, but the Singapore market is closed, any major changes in London Eurodollar quotations are reflected in Asian dollar interest rates the next day.20

This complex time arbitrage resulted in sizable fluctuations in interest rates on the U.S. dollar between the Asian currency market and London. The variance of the interest differential between these markets can serve as an indicator of a change in financial integration of the ACU banks in Singapore and the Eurocurrency market. Indeed, the variance for the differential on three-month dollar deposits for the period 1969-70 is two and a half times the variance for the period 1975-76. (See also Chart 2.)21 This indicates that fluctuations in the Singapore-London differential have decreased significantly since the early years. Also, in the early years of operation, deposit rates offered by the ACU banks were fractionally lower than the comparable rates in London, and the loan rates were fractionally higher. The banks could offer lower deposit rates because they were accepting deposits of a much smaller size than that accepted by banks in the major Eurocurrency centers. Furthermore, during the first few years, a wider spread in the Asian currency market permitted the banks to take into account the risk involved in contracting deposit and loan rates prior to the opening of the London market. However, the increase in the size of the market over the years, the learning process in time arbitrage, and competition generated by the increase in international financial integration withered away this differential in charges by the end of 1973.

Chart 2
Chart 2

Singapore: Differences on Three-Month Bid Rates Between Singapore and London, 1969-February 1977

(In per cent per annum)

Citation: IMF Staff Papers 1978, 002; 10.5089/9781451946826.024.A001

Sources: ACU banks’ dollar interest rates: Straits Times, and Robert F. Emery; Eurodollar notes: Economic Group of the Chase Manhattan Bank.

Another aspect of financial integration between markets and of responses to the risk is shown in the comparative movements of the spread between quotations for offer and bid interbank transactions in the two markets. (See Chart 3, in the Appendix.) Traditionally, such a spread did not exceed ⅛ of 1 per cent in the Eurocurrency market. A doubling of the spread to ¼ of 1 per cent, for a period of time, would reflect a disturbance in the market that had significantly increased the risk to the banks. In the early years, the usual spread in the Asian currency market was 316 to 516 of 1 per cent on maturities of one month and higher. This wider spread reflected the risk inherent in operations in a new market, and an initial lack of competitive pressures from banks operating in other markets. This difference in spread disappeared in September 1972.

However, the two markets reacted differently to disturbances created by the Middle East war, by the increase in the oil prices, and by difficulties of several banks involved in Eurocurrency transactions. In the Eurodollar market in London, the spread widened on all maturities through the summer of 1974. Despite being much thinner and subject to short-term fluctuation, the Asian currency market reacted with greater calm. The spread for maturities in excess of one month widened only briefly with the increase in oil prices at the end of 1973, and soon after returned to normal. Although this may have reflected less exposure of the ACU banks to the risks generated by the events in 1973 and 1974, it reflected mainly greater confidence by investors as a result of the cautious approach to international lending by the banks. This greater confidence is also shown by the continuous growth of the Asian currency market (Table 1), despite the Herstatt bank failure in 1974. During the same period, the Eurocurrency market experienced a period of retrenchment, with its size decreasing in the third quarter of 1974.


The Asian currency market has provided substantial benefits to the Asian region by facilitating large inflows of funds that otherwise might not have become available. However, questions have often been raised about the benefits that the market has provided to Singapore, its host country. Recorded flows between the Asian currency market and Singapore22 (Table 5, in the Appendix) do not provide an adequate picture, because they do not include substantial unrecorded flows coming via Hong Kong. Furthermore, as the balance of payments data indicate (Table 6, in the Appendix), the major contribution of foreign capital to Singapore has come from flows of direct investment that have not directly involved the activity of the Asian currency market. On the whole, net flows of Singapore’s commercial bank capital have reflected cyclical forces at home and abroad; they have experienced inflows in periods of domestic booms and tight money, and outflows in periods of domestic recessions and high liquidity.

The contribution of the Asian currency market to the real income of Singapore can be estimated in terms of: (1) banks’ earnings from operating ACU accounts, net of profits remitted to head offices abroad; (2) direct contribution of the Asian currency market to the gross domestic product (GDP); and (3) contribution to the GDP, which would also include external economies generated by the market. While bank earnings from ACU accounts retained by Singapore can be roughly estimated, the remaining two methods can yield only a qualitative evaluation because the relevant data are lacking.

(1) A rough estimate of gross income by banks from operating ACU accounts and of earnings retained by Singapore can be imputed from data on assets and liabilities for various categories of transaction and from quotations of interest rates on these transactions. These estimates are shown in Table 4. Gross income from ACU accounts comes from three main sources: (a) a spread between bid and asked on deposits of ⅛ of 1 per cent in recent years; (b) a premium on loans to customers other than banks, averaging about 1.5 per cent in recent years; and (c) the earnings from the maturity transformation through borrowing short and lending long. Depending on the maturities involved, the differential between borrowing and lending rates may vary from ½ to 1¾ per cent.23 In addition, one should add (d) earnings from flotations of Asian bonds with an average spread of 1.5 per cent. Total earnings by banks from operating ACU accounts, imputed from these data, amounted to about US$110 million in 1976, which is about 2 per cent of Singapore’s 1976 GDP.

Operating costs of ACU banks that are expended in Singapore are imputed in alternative ways. The first takes three U.S.-based international banks that have the lowest ratios of operating costs24 to income net of interest costs (i.e., total income minus interest payments) on deposits and other borrowed funds. The three banks, whose operating costs in 1976 ranged 50 to 60 per cent of income net of interest payments,25 are banks that are heavily involved in worldwide Eurocurrency operations. Although salaries in Singapore are probably below the average of salaries paid by these banks worldwide, more than one half of ACU banks had been in Singapore three years or less at the end of 1976 and therefore have a much higher ratio of operating costs to gross income than do the banks that were already established. On this basis, the expenditures of ACU banks in Singapore range between US$55 million and US$65 million.

Table 4.

ACU Accounts: Imputed Income, 1976

(In millions of U.S. dollars)

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Includes 75 per cent of the average deposits in 1976 to US$15 billion. The adjustment is made to take into account double counting in data on interbank transactions. See also footnote 11 in the text.

Singapore interbank offer rate.

US$5.8 billion.

Equal to the range of the lowest ratios of operating cost (net of interest payments) to gross income in three multinational banks based in the United States. See also footnote 25 in the text.

See text, fifth paragraph in section. contribution to Singapore.

The alternative method is based on a hypothesis of highly competitive conditions in international financial markets. Under such conditions, profits that are repatriated to head offices relate to business risk assumed by the banks. On this basis, earnings in excess of the prime rate, which was 0.75 per cent over the Singapore interbank offer rate (SIBOR) in 1976, were remitted as profits abroad. Imputed in such a way, profits in 1976 amounted to US$47 million, and the amount expended in Singapore was $62 million.

Both methods lead to estimates of earnings from ACU operations that are retained in Singapore amounting to 1 per cent of Singapore’s GDP in 1976. It is clear that these calculations are only approximate but despite possible overstating of the extent of the maturity transformation,26 they should be taken as conservative. The earnings shown in Table 4 do not include income from transactions, such as letters of credit, foreign exchange trading,27 commitment fees on undrawn loans, and management fees of syndicate leaders and comanagers,28 as well as income from other services performed for customers whose funds are managed.29 However, the customary premiums over SIBOR are often shaved when very large funds are involved, although in a small international financial market, such as Singapore’s, these large transactions are relatively rare.

Altogether these calculations suggest that operations of the Asian currency market have generated a small, but not negligible, benefit for Singapore.

(2) The second method of estimating the direct effect of the Asian currency market on Singapore’s real income is to trace from national income data the contribution of the ACU bank activity to GDP. Direct estimation is, however, not possible, because Singapore’s GDP statistics do not have sufficiently disaggregated breakdown by sectors to show the contributions of the banking sector. There are data on the financial sector that include banking as a major component but also include insurance, real estate, and business services.30

Between 1965 and 1975, the growth of the financial sector was substantially higher than the growth of GDP and second only to the growth of the manufacturing sector, the mainspring of Singapore’s development during that period. (See Table 7, in the Appendix.) Furthermore, the highest growth rate of the financial sector occurred between 1969 and 1973, which was the period of the fastest expansion of the Asian currency market. Between 1968, the year of the creation of the Asian currency market, and 1975, the ratio of the financial sector’s output to the rapidly growing GDP increased from 8.5 to 10.5 per cent. This indicates the increasing importance of financial activity in general, and of banking in particular, in the economy of Singapore.

Between 1970 and 1976,31 employment in the financial sector (also shown in Table 8, in the Appendix) increased much faster than total employment and even faster than employment in the manufacturing sector.32 The percentage of highly skilled employees33 in the financial sector is almost twice as high as the average for the economy as a whole; furthermore, it has been increasing in recent years at a much faster rate. However, the ratio of employment in the financial sector to assets in the banking sector has decreased over the years. On the assumption that the financial and banking sectors experienced a similar growth of employment, this decreasing ratio suggests that important economies of scale in banking are still not realized at the present time.

(3) The third method would be to evaluate both the direct and indirect contributions of the Asian currency market to Singapore’s income. The fast growth of international banking transactions has stimulated the location in Singapore of a host of related activities that are essential for the efficient working of the Asian market. These activities include forward and spot arbitrage operations, financial and trade brokerage facilities, business-related travel and travel agencies, international insurance, new hotels, and real estate operations. Favorable access to international finance in Singapore and an excellent communications network have stimulated the location of many enterprises specializing in trade. The same reasons have motivated a number of multinational and large regional corporations and investment companies to locate their Asian headquarters in Singapore. Furthermore, since foreign direct investment plays an important role in the industrial development of Singapore, the existence of a well-developed international financial market on its soil has provided an additional stimulus to foreign firms and foreign capital to locate their operations there. A dynamic international financial market also provides a secure haven for funds from abroad that are not directly tied to the productive process, but, above all, the market serves as an excellent indicator of the political and economic stability of the country. Therefore, the Asian currency market has been a major stimulus to the rapidly growing financial sector of Singapore and to some other related activities.34

Despite controls on the participation by residents, the Asian currency market has also had a growing influence on the monetary and financial policies of Singapore. The arbitrage between the Asian market and the Singapore money market, initially via Hong Kong and later also directly, has increased the international mobility of financial capital. This arbitrage has played a major role in progressively relaxing controls over the domestic interest rates, and this in turn resulted in the introduction of a system of competitive interest rate quotations in July 1975. The freeing of interest rates has increased the efficiency of allocating funds among various investment projects, although it may have increased the cost of capital to some sectors that previously could have borrowed at lower controlled rates.

In addition to benefits of the Asian currency market, costs that its development has imposed on Singapore should also be considered. These are mostly direct opportunity costs in terms of real product forgone and some “external” costs related to the effect of market development on other sectors of the economy.

(4) Direct opportunity costs involve the value added forgone by employees who are drawn from other sectors of the economy into the faster growing financial sector. These costs should be examined, however, in the light of Singapore’s historical dependence on immigrant labor.35 Thus, when a shortage of labor developed at the beginning of the 1970s, the authorities liberalized the existing restrictions on immigration and increased the elasticity of supply.36 In the long run, the opportunity costs of increased employment in financial and related sectors consist of the costs involved in the upward mobility of labor. In its general development program, the Government has instituted a number of skill improvement projects that are supported largely by the industries concerned. In banking, a large proportion of training in foreign banking operations has been financed mostly by the banks but partly by foreign students. Therefore, in a rapidly developing economy, such as Singapore, it is difficult to disentangle specific opportunity costs of expansion of the financial sector from costs of ambitious programs in the overall improvement of skills of the labor force.

(5) Another direct cost with potentially important implications would occur if foreign banks that are remitting profits abroad were to expand local business at the expense of Singapore’s domestic banks. This process is, however, minimized by the strict restrictions through licensing procedures of the local activities of new entrants. Furthermore, the phenomenal growth of transactions in the Asian currency market has also increased non-ACU banking activities in which domestic banks are involved.

(6) The major indirect cost of the Asian currency market involves a high level of international reserve holdings that are motivated partly by the Government’s desire to support the role of Singapore as an international financial center. Between 1968 and 1976, Singapore’s gross reserves increased from US$712 million to US$3,364 million. In the 1960s, the reserve buildup reflected the desire of the authorities to achieve a better ratio between gross reserves and rapidly growing imports. The very comfortable reserve/import ratio in the early 1970s was among the highest for developing countries; in 1976, it was similar to the reserve/import ratio of several other developing countries that had a balance of payments surplus.37 In view of the complexity of criteria that are used by countries in determining the desired level of their reserves, it is not possible to estimate the cost of reserves used to support the Asian currency market.

(7) Before 1973, capital mobility that was increased with the existence of the Asian currency market imposed additional costs in terms of limiting the independence of Singapore’s monetary policy. Particularly during the periods of international currency disturbances between 1971 and 1973, ACU banks were instrumental in large-scale arbitrage operations.38 Since domestic interest rates in 1972-73 were higher than those in the Eurocurrency market and the U.S. dollar was depreciating, the inflow of funds through the banks created an excess of liquidity at home that could not be neutralized by the authorities. Floating of the Singapore dollar in May 1973 permitted the authorities to regain a large degree of independence in their domestic monetary policy.39

In summary, it appears that the Asian currency market has provided a modest contribution to real income in Singapore. Rough calculations suggest that a direct contribution in terms of gross earnings from international banks that remain in Singapore is in the order of 1 per cent of GDP. As evidenced by a very rapid expansion of the financial sector, the indirect contribution of additional employment in related activities and of substantial improvement of skills is probably larger. An estimate by the Singapore authorities that the Asian currency market contributed about 3 per cent of its GDP in 1976 appears reasonable.

III. Conclusion

The creation of the Asian currency market in 1968 responded to a need in Asia for an international financial center that would transcend the limitations of its national capital markets and facilitate the flow of capital needed for economic development. However, the market was a direct result of stimuli by the Government, which wished to develop in Singapore regional financial operations contributing to domestic real income and to the economic and political standing of the country. The first nine years of operations of the market have been quite successful. Although still small by international standards, the market has become an important link in international financial arbitrage around the globe. Banks operating in the market have established an extensive network of transactions in the Pacific region and have developed a host of related activities in Singapore, making it an important financial center for the Asian region.

Although the banks operating in the Asian currency market have drawn a large proportion of their financial resources from Asia and the Western Pacific, one of the important functions of the market has been to channel the funds from the major capital markets and the Middle East into the Asian region. In recent years, a number of international bond issues have been floated in the market and the banks have participated in medium-term and long-term syndicated loan ventures. The banks also have participated in recycling surplus funds of the members of the Organization of the Petroleum Exporting Countries. However, the cautious approach by the banks and the supervision of the Monetary Authority of Singapore have helped the banks to minimize disturbances created by the recent unprecedented strain on the international payments system and by the difficulties experienced in the Eurocurrency market.

All indications show that the market has provided a contribution to the employment and income of Singapore. The direct contribution of the banks operating in the Asian currency market is estimated to be roughly of the order of 1 per cent of GDP. The indirect contribution, in terms of a host of related activities stimulated by the market, appears to be significantly larger. The major costs consist in sizable international reserves, a proportion of which are held as a support during the initial stages of the market’s development. A rapid growth and the stability of the market suggest, however, that although net benefits may not be large at the present time, their potential for the future may be sizable.


Chart 3
Chart 3

Singapore and London: Bid-Offer Spread on Seven-Day to One-Year Deposit Rates of Eurobanks and ACU Banks, 1971-Mid-1977

(In U.S. dollars)

Citation: IMF Staff Papers 1978, 002; 10.5089/9781451946826.024.A001

Sources: ACU banks’ dollar interest rates: Straits Times, and Robert F. Emery; Eurodollar notes: Economic Group of the Chase Manhattan Bank.
Table 5.

Asian Currency Market: ACU Banks’ Claims on and Liabilities to Residents of Singapore, December 1973-September 1976

(In millions of V. S. dollars)

article image
Source: Monetary Authority of Singapore.

Includes statutory authorities of Singapore.

Table 6.

Singapore: Balance of Payments, 1969-75

(In millions of SDRs)

article image
Sources: International Monetary Fund, Balance of Payments Yearbook, and Singapore, Department of Statistics.
Table 7.

Singapore: Output in Selected Sectors of Industry, 1965-75

(In millions of Singapore dollars)

article image
Sources: Department of Statistics, Yearbook of Statistics, Singapore, 1971-76; Ministry of Finance, Economic Survey of Singapore, 1976.

Includes banking, other financing, insurance, real estate, and business services.

Table 8.

Singapore: Employment and Skills in Selected Sectors of Industry, 1970-76

article image
Sources: Department of Statistics, Yearbook of Statistics. Singapore, 1971-76; Ministry of Finance, Economic Survey of Singapore, 1976.

Ratio of professional, technical, administrative, and managerial workers to total labor force in each sector.

Includes banking, other financing, insurance, real estate, and business services.


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Mr. Hodjera, Senior Economist in the Research Department, has degrees from the Graduate Institute of International Studies in Geneva and from Columbia University and also has studied at Oxford University. He has been lecturer at the City College of New York, Assistant Professor at Yale University, and Visiting Associate Professor at the University of Virginia. He has contributed a number of articles to economic journals.

Comments on an earlier version of the paper by colleagues in the Fund, by Alan E. Moore of the Bahrain Monetary Agency, and by Sarra Chernick are gratefully acknowledged. The author is also grateful to the Economic Group of the Chase Manhattan Bank and to Robert F. Emery of the Board of Governors of the Federal Reserve System for very useful statistical data. None of these institutions and individuals are, however, responsible for the final product.


Lee (1971), pp. 46-47.


These regulations were codified in the Banking Act and the Foreign Exchange Act, both of 1970.


The Asian Currency Unit (ACU) is a separate set of accounts in which are recorded all transactions with nonresidents. Although ACU operations are not subject to exchange controls, the banks are required to submit to the exchange control authority detailed monthly reports of their transactions, classified by each convertible foreign currency and by each major transaction group.


Singapore’s exchange controls on capital movements are rather complex. After World War II, for exchange control purposes, Singapore was part of the U. K. Scheduled Territories (hitherto called sterling area), which included the whole sterling area of that time. Transactions within the area of Scheduled Territories were free of controls. Although Singapore ceased to be a U. K. Scheduled Territory in the 1950s, it made no changes in the list of countries with which transactions were not subject to exchange controls. In February 1976 non-sterling area members of the Association of South East Asian Nations (ASEAN)—Indonesia, the Philippines, and Thailand—were added to the list of postwar sterling area countries as Singapore’s Scheduled Territories, not subject to exchange controls. Thus, exchange controls are applicable to all countries that were not members of the sterling area in the 1940s and are not members of the ASEAN.


In operating ACU accounts, the banks were initially authorized to transact with nonresidents in 14 “specified” major convertible currencies and, of course, in sterling area currencies that were not subject to control. (See International Monetary Fund, Twenty-Seventh Annual Report on Exchange Restrictions, Washington, 1976.) Since March 1976, ACU banks have been authorized to transact in all convertible foreign currencies.


See Wong (1975), pp. 101-102.


However, opening new branches in Singapore by fully licensed foreign banks is subject to the approval of the Monetary Authority, which is rarely given. (See Thorn, 1975, p. 93.)


Legally, merchant banks in Singapore are governed by the Finance Companies Act of 1970.


The most recent regulation by the authorities, of February 1976, authorizes maximum deposits equivalent to S$250,0O0 for individuals and S$5 million for corporations. ACU bank lending to residents requires authorization by the Monetary Authority, but loans for exports for up to three months can be made without authorization.


“Economic Survey of Singapore” (1976), p. 47. Of the 69 ACU banks, which also include local banks, 19 are fully licensed, 12 have restricted licenses, 25 have offshore licenses, and 13 are merchant banks.


The major proportion of the sum total of US$17 billion of assets and liabilities includes interbank transactions; hence, there is considerable double counting. Informal estimates of the net size of the Asian currency market would reduce the figures shown in Table 1 as interbank transactions by about 20-30 per cent.


See Emery (1975), pp. 13-14 and 27.


See Bhattacharya (1977), p. 37; also Cushman, Euromoney, Supplement (May 1976), p. 12.


See Cushman (cited in footnote 13), p. 13.


This increased dependence on the U.S. dollar in the period of flexible exchange rates is caused by: (a) the dominant role of the U.S. dollar in Asia as a vehicle currency in trade and in most other financial transactions; (b) the importance of multinational corporations with head offices in the United States as participants in the Asian currency market; and (c) the dominance of U.S. banks in financial transactions in the region.


Emery (1975), pp. 13-14 and 27.


At the beginning of 1976, the method of reporting was changed by the Singapore authorities from classification by original maturity to classification by outstanding period to maturity. This has provided better information about the maturity transformation by the ACU banks, but has interrupted the continuity of the series. As is to be expected, the new classification has shortened the maturity of all claims and liabilities. Yet, it has also increased the gap between claims and liabilities with maturities of three months and less, indicating a greater degree of maturity transformation than appeared in the earlier data. This greater degree of maturity transformation is also confirmed by a substantial increase of claims with maturity in excess of one year. The new classification introduced in early 1976 also shows that most longer-term loans are granted on terms exceeding three years.


However, data reported in Table 3 overstate somewhat this difference from the Eurocurrency market. Although most banks report the maturity structure of their credit on the basis of the commitment period, some banks report maturity of credit with floating rate on the basis of a period when interest rates are adjusted, which is three to six months.


In 1975 and in 1976, the European Investment Bank floated two issues of six-year bonds.


This behavior is confirmed by the regression analysis of the movements in interest rates on seven-day dollar deposits in the Asian and Eurocurrency markets. Matching observation for the last Wednesdays of the months in the Asian dollar market with observation one day earlier in London improves the regression coefficient to 0.98, compared with 0.90 when the regression is estimated with the quotation of the same date. The period of observations was May 1973 to February 1977.

A very close relationship between interest rates on federal funds in New York and on overnight Eurodollars in London (Morgan Guaranty Trust Company, 1977) confirms that interest rate developments in the United States are factors in determining interest rate movements of Eurodollars in London. Therefore, in setting their Asian dollar interest rates at the opening of the business day, most Singapore branches of U.S. banks are heavily influenced by developments in the U.S. money markets. No data on overnight Asian dollar rates are readily available to permit a statistical testing of this hypothesis.


The period 1971-74 was dominated by disturbances related to the international monetary crisis and the effects of changes in oil prices. The observations over this period were, therefore, omitted from the comparison.


Assets with, and liabilities to, residents in Singapore have seldom exceeded 10 per cent of total assets and liabilities of the ACU banks.


These differentials are affected to an important extent by cyclical movements in the Eurodollar rate. The differentials relate to 1976, a period of declining Eurodollar rates. In that year, the differentials were larger than in 1977, when the interest rates appear to have bottomed out.


Operating costs include (a) salaries and other employees’ benefits, (b) rents and other expenses on buildings and equipment, and (c) other transaction costs, such as costs of communications, brokerage fees, and insurance.


The three banks are J. P. Morgan (50 per cent), Citicorp (59 per cent), and Bank-america (60 per cent). These percentages are calculated from income statements in annual reports of the banks and from Moody’s Bank and Financial Manual, 1977, Moody’s Investors Service (New York, 1977).


An increasing tendency toward loans with floating interest rates, which are adjusted every six months, tends to decrease the scope for maturity transformation.


Although most transactions in the Asian currency market are in U.S. dollars, they involve considerable amounts of conversion from national currencies into dollars and vice versa, which is an important source of revenue for ACU banks.


See Bee in Mathis (1975), pp. 154-58.


Also, banks can increase their earnings by modifying maturity transformation in the course of cyclical fluctuations of interest rates. When interest rates are declining, they try to minimize the length of maturities of their deposits and to maximize the length of maturities of their loans; when interest rates are rising, they are pursuing the opposite strategy.


These data are shown in Table 8, in the Appendix, together with data on total GNP and on the other two major sectors—manufacturing and commerce.


The period for which data are available. There was a change in the sampling procedure in 1974, so that 1974 data may have been understated.


This was caused mainly by the recession in 1974-75, which has affected employment in manufacturing but has not significantly affected the trend of employment in the financial sector.


Highly skilled employees are defined as professional, technical, administrative, and managerial workers, while those less highly skilled include production, clerical, sales, service, and agricultural workers. (See Singapore, Yearbook of Statistics, 1975176, Tables 3.5 and 3.7.)


Another method of evaluating the contribution by the international financial market to the real income of the host country was suggested by Johnson (1976, pp. 263-75) in his study of the offshore market of Panama. Johnson singled out the following five ways in which the growth of the financial market can increase income at home: (1) by increasing employment and improving skills of the population; (2) by encouraging saving and capital accumulation through the increase in efficiency of financial intermediation and by lowering the cost of capital in the process; (3) by increasing revenue from taxes on profit of the banks and on income of their foreign employees; (4) by increasing earnings from tourism because international finance involves a great deal of short-term international travel; and (5) by increased rent from land and buildings caused by the market-induced rise in demand for these facilities. Because of the lack of relevant data, Johnson was able to provide only an illustrative analysis of the effect of some of these adjustments on real income in Panama. Quantitative analysis of the contribution of the Asian currency market to real income in Singapore along these lines is not possible for the same reason.


See Buchanan (1972), pp. 65ff.


The immigration was restricted in the 1950s and particularly in the 1960s because of the authorities’ concern about the effect of the closing of British military installations on local employment. However, fast economic development rapidly absorbed labor that was released from these installations. In the 1970s the authorities proceeded to liberalize immigration permits, with efforts being made to obtain labor with skills that have been in short supply locally.


For 1976, reserves amounted to 4.1 months of imports of goods and services in Singapore, 4.3 in the Philippines, 4.6 in Brazil, 5.6 in Thailand, and 5.8 in Colombia. (See IFS, August 1977.) However, when entrepot imports are excluded, Singapore’s ratio increases and becomes similar to those of Thailand and Colombia.


Monetary Authority of Singapore (1973), p. 30. Such practices were allowed under the regulations on ACU, as specified in the Banking Act of 1970. In 1972-73 these practices consisted in converting the funds into Singapore dollars and placing them with local banks, which in their turn invested them in the booming real estate market. (See also Bhattacharya, 1977, pp. 68-69.)

IMF Staff papers: Volume 25 No. 2
Author: International Monetary Fund. Research Dept.