The full and final deregulation of interest rates does not seem to have produced any great surprises.
It is now ten days since the last remaining Interest Rate Rules were abolished. Although it is, of course, too early to say for sure, to judge from events so far there does not seem to be much cause for serious concern to the HKMA, as the banking supervisor.
We have, since 3 July, conducted daily surveys of over 30 major retail banks in order to monitor the impact of deregulation on the banking sector. The first and most obvious observation from these daily surveys is that different banks are offering different interest and fee structures. Most of the banks surveyed have set their "basic" savings rate at around 2%, the level at which the savings rate would have been set had the Interest Rate Rules been still in force. But a few large banks have pitched it slightly lower, at 1.75%. Tiered interest rates on savings accounts have also been introduced by the majority of banks, going below the basic savings rate of 2% for small amounts, with some introducing charges as well, and going above 2% for large amounts.
The second observation is that quite a number of new products have been introduced. One product, for example, links the savings rate to the Hong Kong Interbank Offered Rate (HIBOR) for large amounts, which puts it to well above 3% under current conditions in the interbank market. A significant number of banks have also started to offer combined savings and current accounts or automatic transfer services between savings and current accounts. In effect, therefore, some banks are already paying interest on current accounts. It is, of course, too early to tell whether this is emerging as a definite trend, although I suspect that there is a high probability that this will be so.
The third observation is that, notwithstanding the significant difference in savings rates offered by different banks, and the new products now available, there has been no significant migration of deposits among licensed banks. Where there have been unusual changes reported, they were not initiated by a desire to go for higher interest rates offered elsewhere. This I found a little surprising. But, ten days after deregulation, it is still too early to tell. So we need to continue to monitor carefully.
The fourth observation is that, given the many differences now seen, in terms of the actual levels of the savings rate, the structure of the rate schedules used and the variety of new products, there does not appear to be any indication that the banks are colluding with each other. This is good because it is a manifestation of competition at work.
The fifth observation, however, is that some depositors, mainly those with small amounts saved, are having to accept a lower interest rate for their savings. This is a regrettable, but perhaps an inevitable, outcome, as the banks are forced by competition to charge users for their services. Here consumer issues are involved and are attracting increasing attention in the community. The Code of Banking Practice is currently the avenue for tackling these issues and, to be fair to the banks, we ought to give the Code a little time to see if it takes account of consumer interests satisfactorily. My view on the subject is clear and I do not need to repeat it here.
The last observation, which is quite a preliminary one, is that the scope for deposit rates, particularly the savings rate, to be bid up as a result of deregulation seems to be rather limited in the current environment. Indeed, there is an impression, but probably a false one when all savings deposits are taken into account, that on average the savings rate has instead been lowered as a result of taking this final step in interest rate deregulation. Whatever it is, the lack of a significant change in the average savings rate, compared with the one that would otherwise be determined by the Committee of the Hong Kong Association of Banks, is perhaps not unexpected. Competition for banking assets, in particular mortgages, has been so severe in the past couple of years that there is not much room left for the net interest margin to be further compressed.
We shall continue to watch the situation closely.
Joseph Yam
12 July 2001
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