The HKMA considers many factors in implementing regulatory initiatives in order to achieve a balance between costs and benefits.
The Financial Stability Forum, in which I participate, has recently added its voice to discussions about whether the international standard-setting process is working as well as it should be. In recent years there have been a lot of new standards affecting the financial sector. While each new standard, on its own merits, may make good sense, putting them together efficiently and effectively is a challenging task for regulators.
In the past few years, a number of major new standards have been introduced that affect the banking industry. Examples include the new capital adequacy standards ("Basel II"), new anti-money laundering requirements, and new accounting standards. Dealing with the introduction of so many standards concurrently has admittedly placed quite a burden on the industry.
In Hong Kong we are acutely aware of this. Theoretically we could choose not to implement certain new standards, or at least spread their implementation over a longer period. However, this might be damaging to Hong Kong's position as an international financial centre. Our reputation might be tarnished if we were slow to adopt the international standards and best practices, which are being, and in some cases already have been, adopted in other major international financial centres.
Many Hong Kong banks - indeed many Hong Kong companies - operate on an international stage. They want to be able to adopt the same practices in Hong Kong as they do elsewhere. For example, the big international banks will be adopting Basel II globally, so they naturally want to be able to apply it in Hong Kong. Similarly, major companies don't want to deal with accounting standards in Hong Kong that are different from the new ones already used elsewhere. Hong Kong therefore needs to ensure that its regulatory and accounting standards keep up with international standards.
Hong Kong should not opt out of implementing the new international standards. What, then, can we do to make implementation easier and more cost-effective?
Let me use the implementation of Basel II as an example. The approach we have taken is three-fold. First, we put a lot of effort into consultation. We have been listening to what the industry has to say about the timetable they want, the approaches they want, and the guidance they need from us. Secondly, we have been very flexible in many aspects of the implementation: we have allowed an extended transition period for those planning to use the more advanced approaches; and have devised a simplified approach for the smaller institutions that do not wish, or do not need, to adopt the advanced approaches. Thirdly, we have been trying to harmonise our requirements with those of other regulators to make sure that banks operating in multiple jurisdictions will not have to face inconsistent regulatory requirements.
We believe this approach will help smooth the implementation of Basel II in Hong Kong. I am sure the banking industry would agree that it is important for Hong Kong to be in the initial wave of jurisdictions implementing Basel II, alongside other major international financial centres such as London, Paris, Frankfurt and Tokyo.
Returning to my starting point - the Financial Stability Forum's concerns about the international standard-setting process - what lessons can we learn from Hong Kong's Basel II implementation approach? There are several, I think. First, effective implementation of new standards requires standard-setters to involve those affected in determining how and when the standards should be implemented. Secondly, a practical and pragmatic approach should be used, with appropriate consideration given to jurisdiction-specific factors. Thirdly, an important objective of implementing new standards is to make them consistent with the requirements of other regulators. And fourthly, analysis should be done to ensure that the implementation of new standards is as cost-effective as possible. The additional administrative burden on institutions arising from adopting the new requirements should be carefully taken into account.
We will be applying these general principles when considering any new regulatory initiatives in Hong Kong, in order to achieve a balance between costs and benefits. I hope these principles are also applied internationally by all standard-setters and regulators.
Joseph Yam
13 April 2006
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