Singapore and Iceland - why Singapore's USD 400bn war chest makes all the difference

Iceland's banking problems started surfacing as early as January this year and the Central bank of Iceland had commissioned a report in April this year to investigate the policy options available. This report remained out of public domain but since the spectacular collapse of the island banking model in October, it is now no longer deemed 'confidential'.

Having read the report I cannot help draw comparisions to Singapore:
1/ A small country with its own currency
2/ Internationally active and exposed financial sector larger than its GDP (Singapore banks have combined liabilities of approx 300 USD bn compared to our GDP of approx USD 150bn)

In Iceland case, even when their banks are fundamentally solvent (in the sense that its assets, if held to maturity, would be sufficient to cover its obligations), such a small country - small currency configuration makes it highly unlikely that the central bank can act as an effective foreign currency lender of last resort/market maker of last resort.

In Singapore's case, our USD 400 bn warchest effectively acts as a backstop in the event the state takes over the banks, to replace bank debt with soverign debt. (This is indeed the nuclear option; otherwise, we will have to borrow from the IMF or World Bank.)

Viewed in another perspective, the constraint for any of our local banks to grow regionally or internationally is that the size of our warchest have to be increased in proportion to the size of the banks' liabilities.