Singapore Savings Bonds have an unexpected and risky downside for local banks

Retail deposit competition will intensify.

Singapore Savings Bonds (SSBs) were met with great enthusiasm when the program was launched early in April. However, the new savings scheme could have an unexpected downside for local banks.

Bank of America Merrill Lynch analyst Hak Bin Chua said that the timing of SSBs is not ideal for local banks in light of the slowdown in retail deposit growth.

"Savings bonds will intensify the competition for retail deposits, which has been growing at a slower pace during the past three years. The flow of new savings bonds could significantly reduce the flow of new individual deposits and pressure deposit rates," Chua noted.

The timing is particularly unfortunate as banks will have to meet stricter Basel III liquidity coverage ratio requirements.

"The launch of the savings bonds further risk tightening liquidity and crowding out available loanable funds, further pressuring interest rates. The good intentions of developing retail savings bonds may end up with unintended negative consequences," he said.

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