Keynote Speech at HKAB Distinguished Speaker Luncheon

Thank you Mary, and good afternoon everyone,

1. It is a great honour for me to speak to you formally, for the first time here, as Chief Executive of the HKMA.
2. I feel particularly honoured because I actually wanted to be one of you, to be a banker, when I first graduated from college years ago.  In fact, I joined one major bank, which is represented at the head table here, as what they called a Covenant Officer Trainee back then.  As part of the training, I spent a few weeks working as a teller in the bank’s Shek Kip Mei branch which is right next to a wet market.  So I knew first-hand the challenges that you face in handling customer complaints, especially with the experience of dealing with angry market vendors when you got a bit slow in counting their bags of coins and piles of wet banknotes.  Unfortunately my ambition as a banker ended when I got a call from the Government.  But some skills remain with me: I can still count banknotes as quickly as a bank teller, even to this day!
3. Life takes many turns though, and I joined the HKMA when it was first established in 1993. I have since been involved in almost all aspects of the HKMA’s functions, and have worked with many of you in a productive and collaborative way.  So you can expect consistency and continuity in the way that the HKMA does its work.  But the world does not stand still.  The economic, social and technological environment is constantly changing.  We might see many positive developments, but we can also be sure that there will be new problems and uncertainties, which will require new approaches and solutions from both the banks and the HKMA.
4. So to begin, let me talk about the macro landscape that the banking sector will face in the coming few years.
5. First, in terms of economic outlook, I believe we all agree that things are getting more difficult. Just two years ago, we were still talking about synchronised growth in both advanced and emerging economies.  But now, we are seeing the reverse.  We are more talking about a synchronised slowdown in the global economy, with this year’s global growth forecast to be the lowest since the Global Financial Crisis.
6. This downbeat picture is very much a result of trade tensions, and its effects not only on global trade, but also on manufacturing, investment and even consumption. There are also uncertainties arising from Brexit and other geopolitical events.  But even without these transitory risks, there are still long-term structural trends such as declining productivity growth and ageing populations that the world would have to grapple with.
7. For us in Hong Kong, we should expect more intense negative spillovers if the China-US disputes continue, or if the global economy continues to come down. And a “black swan” event can always take us by surprise.
8. Secondly, on the financial side, there are uncertainties about where monetary policies of major central banks are heading, and how these changes might affect the real economy and the asset markets. As the global economy comes down, most central banks around the world have taken a “reversal” mode from the tightening or normalisation stance just a year or so ago, to the current trend towards monetary easing, either through cuts in interest rates or other unconventional means.  Maybe “lower-for-longer” can really turn into “lower forever”.  But we also need to monitor closely whether these easy monetary conditions would lead to financial imbalances, especially since asset prices are already quite elevated.  Another concern is that when the next major financial crisis hits or if a global recession arrives, central banks will have very little ammunition left to stimulate their economies.
9. Thirdly, the banking sector will face more rapid technological transformation. There are opportunities and challenges associated with this, which I will talk more about later.
10. And then there is the socio-political environment that banks operate in.  The last few months have shown us that banks are indeed affected by what is happening in society at large, sometimes in ways that are totally unexpected.  It reminds us of the importance for banks to have sound business continuity or recovery plans, effective internal and external communications, and good coordination with peers and the regulators.  Despite the problems, I trust that our banks will keep up their good work in serving their customers in a professional manner.
11. So the macro environment in the next few years, unfortunately, will be challenging. We have talked about a downbeat global economy, unpredictable monetary policies of major central banks, rapid technological changes, and an uncertain domestic socio-political environment.
12. Against this landscape, I would like to talk about three key areas where the HKMA must be prepared to adjust to changing circumstances. First, it’s about our core mission of monetary and financial stability, and how we work with banks on that.  Second, our market development work.  And third, the exciting but challenging area of technology.  I will conclude by sharing some thoughts on the relationship between the HKMA and the banking industry.

Monetary and Financial Stability

13. Let me begin with the core mission of the HKMA, which is the maintenance of Hong Kong’s monetary and financial stability. This is the very foundation of our economic development and our role as an international financial centre.  To deliver that, it’s more than just market surveillance, building buffers in the financial system, preparing contingency plans and making all kinds of technical and regulatory preparations.  We have done all that.  A key part in maintaining financial stability is also to uphold confidence in the integrity of the financial system, and a key instrument in doing this is effective communications.  In the last few months, there have been numerous unfounded rumours casting doubts on the Linked Exchange Rate System and financial stability of Hong Kong.  The HKMA has acted very quickly and vigorously to rebut those rumours, to lay out the facts, and to reassure the public, through both traditional and social media.
14. And let me reiterate three key messages that we have been putting out –

• • 1. We see no need and have no intention to change the Linked Exchange Rate System, which has served Hong Kong well since 1983.
    2. Hong Kong will safeguard the free flow of capital and will not impose foreign exchange or capital controls.  These assurances are made very clear in Article 112 of the Basic Law.
    3. Hong Kong’s banking system is robust and sound, with very strong capital and liquidity buffers against negative shocks.

15. I should also reiterate that the HKMA has the capability, resources and determination to maintain Hong Kong’s monetary and financial stability. The Exchange Fund, with over HK$4 trillion in assets, provides a powerful line of defence.  Our Monetary Base, amounting to HK$1.6 trillion, also provides a strong buffer in case there are fund outflows.  And since the Global Financial Crisis, we have built a more robust surveillance framework to monitor fund flows and financial market activities together with other financial regulators, especially the Securities and Futures Commission.
16. But it is crucial for the HKMA and the industry to stay vigilant all the time and be well prepared. While we will continue to work with banks on stress testing and contingency planning for different risk scenarios, banks should also ensure that their governance, culture and risk management controls are at all times sound and robust.  When it comes to safeguarding Hong Kong’s monetary and financial stability, we are in this together.  We are in the same boat.

Market development

17. A healthy and stable financial system is the bedrock for any economy. But at the same time, we need to continue to develop Hong Kong’s status as an international financial centre.  This brings me to the second key area of the HKMA’s work, which is market development.
18. Competition among international financial centres is intense. We cannot afford to stand still on developing our financial services platform just because of what is going on in Hong Kong these few months.  We must move forward, look for new opportunities, upgrade our financial platform, and create more products to strengthen our competitiveness.  We see at least three key trends that we should aim to capture.  And these are China opportunities, green finance and Fintech.
19. The first one is about China opportunities. Hong Kong is already the largest and most important global offshore renminbi business hub.  And we have unique cross-border investment channels like the Stock and Bond Connect schemes.  But there is great potential to further expand Hong Kong’s intermediary role, for example through the development of the Guangdong-Hong Kong-Macao Greater Bay Area.  This region is a huge potential market for Hong Kong’s financing, asset and wealth management, and professional services. 
20. The second trend is green finance. Hong Kong is already emerging as a major global green finance hub.  We are already a go-to place in Asia for green finance specialists and international investors interested in ESG investments.  Green bonds arranged and issued in Hong Kong reached US$11 billion last year – more than triple the level of 2017.  We also launched the first Government Green Bond earlier this year with great market response, and we set up the Centre for Green Finance just a few months ago.  We are also jointly working with you to develop a green banking framework.  I hope all of you will support and join our efforts to create a vibrant green finance ecosystem in Hong Kong.
21. The third trend is Fintech, which I will talk more about later.  But before that, I should add that apart from these three key trends, we are also working on other opportunities that we believe Hong Kong is well-positioned to capture, including infrastructure financing, private equity business, corporate treasury centres, private wealth management including family offices, and so on.  So there is a lot we can do together.
22. I have been asked many times recently how the current events in Hong Kong might affect our market development work. My answer is that “we must double up our efforts”.  We will be left behind if we don’t work hard and advance.  I firmly believe that the fundamental strengths of Hong Kong as an international financial centre are intact.  And we will closely collaborate with all of you to make the most of those strengths.

Technology

23. Let me now turn to technology, the third key area of our work in the coming years. We have achieved a lot in the past few years. We set up the Fintech Facilitation Office in 2016. And we have launched a series of measures, ranging from the Cybersecurity Fortification Initiative to the seven Smart Banking initiatives, which include the launch of the Faster Payment System and the licensing of eight virtual banks.  After the roll-out of these measures, I can now say confidently that Hong Kong is at the forefront of the global move towards Fintech adoption.  In recognition of our vibrant Fintech ecosystem, the Bank for International Settlements has just set up the very first Centre of its new Innovation Hub in Hong Kong.
24. We have made a good start in this exciting digital journey, but there is still a long way to go in providing more convenient and efficient digital services for the public. We need to keep Hong Kong competitive in the digital age.
25. Technology is affecting both the service delivery and back-office operations of banks. This includes, for example, the use of big data, artificial intelligence (AI), machine learning, cloud computing, and regulatory technology (RegTech).  We have to work together to ensure that the industry grasps the opportunities, but we also need to address the risks that come with these new technologies.
26. As a regulator, we are naturally interested in how RegTech can offer banks more cost-effective and automated regulatory compliance. In particular, data analytics and machine learning have huge potential in anti-money laundering surveillance.  Another possible RegTech application could be machine-readable regulations, which we are looking into.  We will organise different RegTech events to further attract the RegTech community to the Hong Kong market, and gradually create a RegTech ecosystem here.  We will also look into key RegTech pain points and provide further guidance to help banks with their adoption of these new technologies.
27. The HKMA itself is also embracing significant technological change. We have embarked on a major digitalisation programme, cutting across multiple departments including banking and AML supervision. Through supervisory technology (SupTech) we can automate supervisory processes and use data-science and network analytics applications to help us identify emerging risks and trends in a more forward looking manner.  We are also undertaking a pilot project to collect more granular data from banks, so that we can have a fuller and more up-to-date picture of banks’ business.  The upshot of this project for banks is that in time, this could have the potential of replacing many template-based regulatory reports and lessening the reporting burden on banks.
28. Fintech offers great potential benefits to banks and their customers and to the regulator. However, it also brings new challenges.  Let me look at three main aspects. 
29. The first is technology risk management. It is essential for banks to have appropriate technology risk controls in place.  One key area is the use of AI.  For instance, what should be the governance framework that banks need to put in place to ensure proper accountability for the use of AI?  Will there be new issues, like whether the use of AI in credit scoring would lead to potential unfair treatment of certain groups of consumers?  To facilitate the adoption of AI by banks in a prudent manner, we have drawn up a set of high-level risk management principles on the use of AI to provide guidance for both conventional banks and virtual banks.  We will be issuing a circular later today for this purpose.
30. The second aspect is consumer protection. We are fully aware that the wider use of digital financial services must be accompanied by enhanced consumer protection.  Only when consumers feel safe and secure in the digital channels that they will trust the banks and feel confident about using these new forms of financial services.  We look forward to collaborating closely with the industry to enhance consumer protection and education.
31. The third aspect is talent development. Fintech is reshaping the financial industry in fundamental ways – and that includes work processes and talent requirements.  The HKMA is now working with HKAB and Hong Kong Institute of Bankers to assess talent requirements in the industry over the next three to five years.  The study includes a skill-mapping exercise to identify the retraining, redeployment and other HR needs in the banking industry.  Again, the HKMA is itself introducing new technologies and applying new data science and analytics.  We too will need to upgrade our skillsets, and this will certainly be a path that we will travel together. 

Partnership

32. I have described our work and future direction in terms of monetary and financial stability, market development and technology. Each of these is vital to our banking sector.  Indeed, each is vital to the economy of Hong Kong.  In order to achieve all these goals, it is essential that the banking sector and the HKMA work together in partnership.
33. And don’t get me wrong, I am not referring to the kind of partners who struggle for their whole life to make the other side miserable. And I certainly do not think a regulator should make the bankers miserable simply to show that he or she has not been too soft or too accommodating.  I mean partnership in a very positive way.
34. By partnership, I mean that we should always keep in mind our common goals. We all want banking services to be efficient and to meet customers’ needs.  We all want banks to be financially sound to command trust from the public and to support the real economy.  Regulators and banks are perhaps coming from different angles – but by working together we can create the highest value for our society.
35. With these goals in mind, I will do all I can to be a “TOP” regulator. By that I don’t mean to be on the top of the list of regulators.  Instead, I want to do my job with an approach that is “T. O. P.” – Transparent, Open, and Proportionate.  I believe that being transparent, open and proportionate is the key to mutual trust and respect between regulator and banks.  As long as we get this relationship right, and achieve a productive partnership, it should be much easier for us all to tackle the challenges I have been talking about.
36. Again, it is a great honour for me to take this position as Chief Executive of the HKMA. My colleagues and I are very well aware of the great responsibility we have to the people of Hong Kong.  I look forward to working with you, the banking industry, to maintain monetary and financial stability, to enhance Hong Kong as an international financial centre, and to help make our city the prosperous, stable and contented community it should be.
37. Thank you very much.