The best of times is the best time to take stock.
Readers are probably aware of the series of reforms of the banking system initiated by the HKMA over the past decade. There was the abolition of the Interest Rate Rules of the Hong Kong Association of Banks, which encouraged competition and efficiency in the banking system, bringing considerable benefit to borrowers and depositors. There was the adoption of risk-based supervision by the HKMA, followed by the new, also risk-based, international supervisory standards commonly known as Basel II. There were also deposit protection and the sharing of credit information among banks, and other initiatives. The result, I am pleased to say, is a more robust and efficient banking system of world-class standard.
When introducing these reform measures, we worked in close partnership with the banks, chiefly through the Committee of the Hong Kong Association of Banks, and other consultative channels such as the statutory Banking Advisory Committee and the Deposit-taking Companies Advisory Committee. Whenever there was a need for new legislation or amendments to existing laws, we have had the invaluable advice and support of Legislative Council Members, who have spent a considerable amount of time examining draft legislation.
The financial environment of Hong Kong in the past decade has not exactly been a benign one. It was characterised by a debilitating financial crisis, the bursting of a property-market bubble in Hong Kong, the bursting of the technology bubble worldwide and the sharp disruption to economic activity as a result of SARS, all occurring in the sensitive period after the political transition. Some say that it is a miracle that there has not been any major banking problem. Others say that Hong Kong has been lucky. Whatever it is, I have no doubt that the alertness and the skilful management of risks by the banking community played a crucial part in maintaining banking stability. We as supervisors may have provided encouragement here and there, and perhaps forcefully sometimes, but it is ultimately the job of bankers to run banks.
In the past four years, after SARS, the Hong Kong economy has performed very well, recording uninterrupted and rapid growth. Asset prices, particularly property prices, have largely been on a strong recovering trend. Indeed, prices of luxury residential properties have scaled new heights. So have stock-market prices. While concern on our part over banking stability had been on the rise, reaching a peak in the second quarter of 2003, when the number of negative-equity mortgages exceeded 100,000, such concerns rapidly receded as the economic recovery gathered pace. Now, almost all (traditional and new) measures of asset quality and the financial soundness of the banking system show a degree of robustness unmatched historically.
I have confidence in the ability of our banking community to continue to run their banks prudently, but one thing very clear from history is that the origin of banking difficulties can invariably be traced back to excessive indulgence in particular activities when times are good. Although risk-based supervision should go some considerable way to limiting such excesses, the best of times is the best time to exercise caution and to search even more diligently for risks that may be hidden. This is particularly so when the banking system has just completed a significant programme of reform and, in the business dimension, has been going through profound changes, notably as the result of increasing economic and financial integration between Hong Kong and the Mainland.
As disclosed at my recent briefing on the work of the HKMA to the Legislative Council Panel on Financial Affairs, I am planning to conduct a review of the banking system. While further thought needs to be put into the details of this project, I wish to make clear that we do not intend to go into how banking business should be conducted - that is best left to the banks. But we will look into recent and likely trends in Hong Kong's banking system and the changing nature of the risks it faces, including such issues as the globalisation of banking business, increased competition among banks, and the growing complexity of banking products. The aim is to assess how we in the HKMA can best discharge our functions under the Banking Ordinance, specifically in promoting the general stability and effective working of the banking system. I am glad to have received support and encouragement for this initiative from Members of the Legislative Council Panel on Financial Affairs. We will be discussing the matter with the banks to work out the details and start the work soon.
Joseph Yam
22 November 2007
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