26 Sep 2002


Initiatives aimed at strengthening market disciplines in the banking sector are intended to help the market work more efficiently - not to "over-regulate".

A criticism that re-emerges every now and again is that the HKMA is in some sense "over-regulating" the business of banking. This is normally in response, I should say, to some particular new initiative we are taking which is not to someone's liking. Instead of arguing against the initiative on its own merits, those who do not favour it may claim that they disagree with it "as a matter of principle", on the ground that it represents over-regulation, which, they say, everyone knows is contrary to Hong Kong's free-market approach.

I certainly agree that regulation for regulation's sake is to be avoided. As a free-marketeer myself, I don't have to be told that too much regulation can stifle market forces and reduce the positive effects of competition and innovation. Before the HKMA proposes some new initiative or other, we consider very carefully the question of whether it is really necessary, and in particular whether the means we have chosen to achieve the objective in question is the most appropriate means in the particular circumstances of the Hong Kong market. One way of ensuring we do this is to consult very widely. It is difficult to overstate the value that is derived from the input into our initiatives that we regularly receive from parties such as the banking industry, LegCo members, the Consumer Council, the general public and the press.

So how do I answer suggestions that we are over-regulating? First, there will always be some initiatives that are necessary simply to achieve our primary central banking objectives of currency stability and banking system stability. An example of such "prudential" initiatives is the work currently taking place internationally to revise banks' capital requirements so that they better reflect the risks banks take in their day-to-day business; the so-called "New Basel Capital Accord". But in fact, few of the initiatives we have been taking recently fall purely into this "prudential" category. Several others have a strong "consumer protection" angle. For example, we have been devoting a lot of attention to the subject of customer complaints; we were closely involved in the review of the Code of Banking Practice, which is very much aimed at ensuring good customer service; and we have been working for some time on a Deposit Protection Scheme, which has both consumer protection and prudential aspects.

But a group of initiatives to which I would like to draw particular attention is those that I would describe as being for the purpose of strengthening market disciplines. As a recent APEC Policy Dialogue held in Hong Kong noted, "market disciplines are an important element in promoting sound and efficient markets, and financial market participants, such as investors, depositors, rating agencies and financial analysts can play a significant role in encouraging financial institutions to manage their risks effectively and thereby foster the development of a stronger financial system". This, of course, is very much in tune with the Hong Kong philosophy, and is why we have in recent years placed so much store on two areas which are key to strengthening market disciplines, namely financial disclosure and corporate governance. Market participants can only make informed decisions if good information is available, which is why we have continued to stress the need for increased disclosure. And market disciplines will be more effective where there are strong incentives for the directors and managers of financial institutions to heed and respond to market concerns, which is why we have continued to push for strong corporate governance.

Many of our initiatives have a very strong "market discipline" element, which is entirely in line with the Hong Kong philosophy of leaving things to the market as much as possible. Or, if I may borrow a term used by the Financial Secretary, perhaps I could describe the approach as being "market enabling". Seen in this context, I would hope that we could all agree that if there is one thing such initiatives do not represent, it is "over-regulation".


Joseph Yam

26 September 2002


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