Financial intermediation - channelling savings into investment - is the raison ?être of a financial system. The role of the regulator is to harmonise the interests of those involved in this process.
Readers may have noticed my repeated emphasis in this column on the importance of the process of financial intermediation - the channelling of savings into investment - to economic growth and development. The reason is quite simply that this important objective, which is the overriding justification for the existence of a financial system, tends to be overlooked or relegated to secondary importance in the development and operation of the financial system.
There are different groups of people involved - those with money to save, those who need money for productive investment, and the financial intermediaries. They have different interests and different roles to play. The savers would like to maximise the return to their savings while minimising risks. Those in need of money would like to have it as cheaply as possible and with as few conditions attached as possible. The financial intermediaries wish to have as large and as profitable a role as possible in providing services to savers and borrowers. The responsibility of the regulator is to harmonise these different interests and to promote stability, integrity, diversity and efficiency in the flow of savings into investments, on which economic growth and development depend.
There is of course enormous attraction in leaving this all to the free market, without any involvement by the authorities or assumption of moral hazard by them. But for obvious reasons this is not practicable. The three different groups of people have different influences on how the important process of financial intermediation is organised. The ability with which they can organise themselves for pursuing their own private interests also differs. The small savers are not in a position to protect their savings. The financial intermediaries are quite capable of organising themselves, in ways which do not necessarily promote free competition, in providing and pricing their services. Those who need money for productive investments have varying abilities to dictate terms and conditions, depending on their influence in the market. So there is a need for regulators of financial markets and supervisors of financial institutions, and indeed they are now an essential part of the financial system in any jurisdiction. Even so, it has not been easy for the relevant authorities always to do a proper job and to safeguard the public interest.
In the history of any financial system, there are inevitably events, possibly disruptive ones of a crisis nature, that indicate, with the benefit of hindsight, that things might have been better organised in a different manner. It is important always to learn from mistakes if they cannot be pre-empted in the first place. Where there is the unusual luxury of spotting weaknesses in benign circumstances, actions that are considered beneficial to reforming the financial system should be taken without delay. It is never too early to do so, although resistance in changing the status quo, which invariably affects vested interests, is always stronger in normal times than in times of crisis. However, with full explanation of the purposes of the reform measures and rational discussions with all concerned, much can be achieved, with efficiency gained and pain avoided.
There are good examples of such initiatives: the removal of the Interest Rate Rules, the introduction of deposit insurance, the promotion of sharing of commercial and consumer credit information, the promulgation of the Code of Banking Practice and various other supervisory initiatives. These initiatives are specific to the banking channel of financial intermediation, and Hong Kong can justifiably be proud to have a banking system that is among the most robust and efficient in the world. There have also been considerable efforts to diversify financial intermediation channels and therefore promote financial stability through the development of the debt market. This started at the beginning of 1990s with the introduction of the Exchange Fund Bills and Notes Programme, which has since developed into a HK$122 billion market, providing the pricing benchmark, and a clearing and settlement framework for the rest of the market. There is still a need for greater efforts in order to diversity financial intermediation in Hong Kong.
This forward-looking process of financial reform will, I hope, continue. I am confident that it will, although immediate benefits are always difficult to articulate and demonstrate. Those who have money to save and those needing money for productive investment are generally well served by the financial system of Hong Kong (current low deposit interest rates notwithstanding) and the financial intermediaries are in a position to appreciate the wider public interest of an effective financial system. I hope all concerned will continue to be supportive of our reform efforts.
Joseph Yam
16 December 2004
Related Press Releases:
Related Information:
Click here for previous articles in this column.
Document in Word format
