The Hong Kong Monetary Authority (HKMA) published today (14 July 1999) its policy response to the recommendations of the Banking Sector Consultancy Study (the Study). A complete list of the policy initiatives is contained at Annex 1 and a timetable for the implementation of these initiatives is at Annex 2. A booklet containing the full details of this package of policy initiatives is attached at Annex 3 and is available for download from the HKMA's website at http://www.info.gov.hk/hkma.
The Banking Sector Consultancy Study was commissioned by the HKMA in March 1998 to evaluate the strategic outlook of the banking sector over the next five years and to consider the effectiveness of its approach to banking supervision. The findings and recommendations of the Study were published in full in January this year for a three-month public consultation, which lasted until the end of March 1999.
"The HKMA has now completed a detailed review of the consultants' recommendations. Taking into account the views received during the three-month public consultation, we have developed a coherent package of policy initiatives, which has been endorsed by the Government, for the reform and further development of the banking sector in Hong Kong", said Mr David Carse, Deputy Chief Executive of the HKMA.
Mr. Carse explained that, "the Consultancy Study identified the forces and trends at work in the global financial services industry. These all point to an inevitable increase in competitive pressure within and across traditional industry and geographical boundaries. The forces of globalisation and liberalisation are common features of the financial services industry around the world."
"The HKMA's policy response has thus been formulated to embrace the general theme that carefully planned liberalisation of the banking market is necessary if Hong Kong is to maintain its position as a leading international financial centre. But it is important that market liberalisation takes place within a stable environment if Hong Kong is to realise the full benefits of increased competition", said Mr. Carse.
"The increase in competition should result in more product innovation and more efficient allocation of resources in the market. For the local banking industry, the challenge is for them to upgrade their skills and system capabilities in order to continue to compete effectively. Some banks may find that the best way to meet these challenges would be to merge or form strategic alliances with other banks in order to improve their competitive position", Mr Carse added.
Two of the more prominent features of this reform package concern the deregulation of the remaining interest rate rules and enhancing depositor protection in Hong Kong.
Having carefully considered the views of the banking industry and other non-bank organisations, such as the Consumer Council, the HKMA plans to deregulate the remaining interest rate rules within a shorter time scale than that recommended by the consultants, while ensuring that this takes place in a relatively stable economic and financial environment. A set of objective monitoring indicators has been identified for this purpose.
The first phase of deregulation, scheduled to take place on 1 July 2000, will see the restrictions on the remaining regulated time deposits (i.e., those with a maturity of less than seven days) lifted. The interest rate rules on current and saving accounts will be deregulated together in the second phase, which would take place 12 months after Phase 1.
"Under this approach, the time-frame to deregulate the remaining interest rate rules is shorter than the three-phased approach recommended by the consultants. Combining the deregulation of savings and current accounts into one phase has the advantage of enabling banks to adopt a more co-ordinated strategy to modify systems and products sets, thus facilitating product innovation", said Mr Carse.
On depositor protection, the HKMA notes that there continue to be diverse views among market participants and other non-bank organisations on this subject. The Asian crisis has prompted a number of countries in the region to move towards more explicit forms of depositor protection. Further, there are options available for enhancing depositor protection other than deposit insurance. Given the circumstances, the HKMA considers it appropriate to carry out a full study in the first half of 2000 into the feasibility and desirability of a deposit insurance scheme or other forms of depositor protection in Hong Kong.
Regarding other measures to strengthen the safety and soundness of the banking system, the HKMA clarified its role as the lender of last resort in a policy statement announced last month. The HKMA will also continue its work on improving the disclosure framework for all authorised institutions in Hong Kong and is taking steps to develop a more formalised risk-based approach to banking supervision. On the banking sector reform side, the HKMA will undertake a thorough review next year of ways to convert the current three-tier system of authorisation into a two-tier system. It will also take immediate measures to relax the one branch policy currently applicable to most foreign banks and to allow access by restricted licence banks to the Real Time Gross Settlement system.
In addition to the initiatives arising from the recommendations of the consultants, this package of policy initiatives contains measures which the HKMA wishes to pursue in order to further enhance safety and soundness of the banking system as a whole. These additional initiatives include a feasibility study on establishing a credit register to provide relevant information to lending institutions on corporate enterprises' overall indebtedness, and measures to promote higher standards of corporate governance among authorised institutions through strengthening the role of the board of directors.
Hong Kong Monetary Authority
14 July 1999