Hong Kong's banks remain remarkably strong after two years of financial crisis. With the worst of that crisis now over, banks can meet the challenges of the future with a sense of purpose and realism.
The season for reporting bank results has come and gone without too much excitement. This is as it should be. Some banks have made more profits and others have made less in the first half of 1999, compared with either the first or the second halves of last year. One listed bank has actually lost money, bearing out my earlier 'prediction' that 'I would not be surprised if one or two banks made losses.'
In the event, the community has taken this unfavourable news very calmly, an illustration of the increasingly sophisticated approach that people in Hong Kong adopt towards financial issues. Public confidence in Hong Kong's banking system continues to be strong, notwithstanding the difficult economic background. Credit must be given to the responsible attitude of our friends in the media in helping to foster this confidence by setting the scene in a clear, balanced and realistic way. They too realise that, in a free-market economy, no business has a cast-iron guarantee that it will make a profit. Why should banks be any different, particularly when we have been going through one of the worst periods of financial turmoil in Hong Kong's recent history? It would indeed be surprising if none of them made loss in these circumstances.
The important thing here is that when banks do make losses, the interests of their depositors are adequately protected. The best protection is provided by banks which are prudently managed, which maintain substantial capital and liquidity, and which conduct their operations with a high degree of transparency through timely disclosure of their financial positions. To ensure that these conditions are achieved, a system of prudential supervision is necessary, in which the banking supervisor, without being officious or intrusive, works closely with the bank management. I believe that we have such a system in Hong Kong, and I am glad to see that it commands the confidence of the community, and particularly of depositors. We have kept this system as up to date as we reasonably can, keeping a careful eye on changing international supervisory standards and on the rapid development of financial markets, with all their attendant risks. Legislative changes are often necessary to take forward our supervisory system, and indeed a banking amendment bill is now almost a recurrent annual item in the legislative programme.
Before the financial turmoil, the average capital adequacy ratio of our locally incorporated banks was around 17% (end of June 1997). After two very difficult years this has, in fact, increased to over 19% (end of June 1999). The average liquidity ratio of these banks has remained high at around 45%. Certainly, there have been cases in which the senior management of individual banks has been replaced. But this is a normal feature of business life, and there is no reason why banks should be any different. What matters is that the board of directors should play an active role in monitoring management performance, and should be prepared to make the necessary changes when they are called for.
Although there are still problems with exposures to Mainland enterprises, and there may still be moderate increases in non-performing loans, there are signs that Hong Kong's banking sector has now moved beyond the worst of the financial turmoil. I am particularly glad to see that, in contrast to many other parts of the region, there have been no casualties.
There are many challenges ahead of Hong Kong's banking sector. They involve a variety of complex and often tricky issues. But I am confident that, driven by a motivated bank management and a market-oriented approach, and supported by a financially sophisticated community and highly responsible media, our banking sector can meet these challenges openly and with a sense of purpose and realism.
Joseph Yam
9 September 1999
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