Foreign banks in Singapore holding large deposits may be forced to incorporate their retail operations locally.
Singapore wants to ensure that if the foreign bank runs into trouble, it won't protect its core domestic business at the expense of its retail customers in Singapore.
The move is also expected to force more commitment of capital by these banks.
This is now a trend among local regulators around the world to protect their home turf by forcing global banks to "ring-fence" their retail operations in overseas markets.
Hong Kong and China already have similar rules in place and other countries, including Thailand, have signalled they have similar intentions.
The new rules in Singapore are likely to increase costs for banks like Australia & New Zealand Banking Group Ltd, BNP Paribas, and HSBC.
ANZ said in a statement it was supportive of the new rules, but had yet to meet them.
"The road to locally incorporating our retail operations is some way ahead and we are open to ongoing conversations" with the Monetary Authority of Singapore, said Vishnu Shahaney, chief executive of ANZ Singapore.
Other banks that could be affected are ICICI Bank Ltd , State Bank of India, and Malaysia's Malayan Banking Berhad, known as Maybank. Officials with Maybank said Friday they were prepared to locally incorporate if the government required.
From the point of view of the banks, incorporating locally "involves significant set-up costs, plus they lose some of the flexibility attaching to operating as a branch," said Simon Topping, KPMG's Asia-Pacific head of its Financial Services Regulatory Centre of Excellence.
"They also need to tie up capital in the subsidiary, which may not always be welcome," he said.
The new rules in Singapore will apply to foreign banks that are important to the domestic market and that operate under Singapore's Qualifying Full Bank licence, said Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam.
QFBs can open several branches in Singapore and accept retail deposits. In contrast, most other foreign banks are restricted to just one outlet and can accept retail deposits.
Tharman said the central bank would consider allowing foreign banks that incorporate locally to open an additional 25 places of business, of which up to 10 may be branches.
The government still wants domestic Singapore banks to hold at least 50 percent of local deposits, Tharman said, reiterating a long-standing position.
By forcing foreign banks to commit capital in Singapore, they may decide to compete more aggressively against domestic lenders DBS Group, United Overseas Bank and Oversea-Chinese Banking Corp.
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