Hong Kong Monetary Authority Annual Report 1997

BANKING STABILITY

One of the principal objectives of the HKMA is to promote the safety and stability of the banking system. The importance of this objective was highlighted by developments in the region in the second half of the year.

 

OBJECTIVE

As regards banking supervision, the HKMA's primary objectives are to promote the stability and safety of the banking system and to provide a measure of protection to depositors, in each case within an environment in which authorized institutions retain the ability to operate on a competitive and commercial basis. To achieve these objectives, the HKMA maintains a regulatory framework for prudential supervision of authorized institutions which is fully in line with international standards, particularly those recommended by the Basle Committee on Banking Supervision and the IMF.

 

ACHIEVEMENTS

OPERATIONAL SUPERVISION

The HKMA aims to conduct an off-site review of every authorized institution and to hold a prudential meeting with its management annually. On-site examinations are conducted with a targeted frequency of at least once a year for locally incorporated institutions and every 18 months to three years for foreign institutions. The precise frequency will be determined by the HKMA's risk assessment of the institution. Tripartite meetings between authorized institutions, their external auditors and the HKMA are also an important element of the HKMA's supervisory approach.

The emphasis in 1997 was on the early identification of problem areas and the risk-based allocation of resources. This entailed prioritising work on institutions which were identified as meriting close attention because of problems or weaknesses of some kind. It also entailed targeting institutions with relatively higher exposure to such areas as property lending, share margin financing and taxi financing. Short focused examinations were carried out on a number of institutions specifically to assess the appropriateness in the circumstances of their policies, procedures and control systems in these areas.

Assessment of the risk management of institutions active in treasury and derivative trading was a major focus throughout the year. In the latter part of the year, in particular, resources were targeted towards the examination of institutions with active treasury operations with a view to seeking assurance as to the robustness of their risk management systems in stressed market conditions.

In the latter part of the year priority was also given to monitoring the market situation in the light of the Asian currency turmoil and to reviewing the impact on institutions?financial condition, including their liquidity, asset quality, and adequacy of provisioning and capital.

In addition to off-site reviews, on-site examinations and prudential and tripartite meetings, another important task that falls to the Banking Supervision Department is to review applications for approvals under various sections of the Banking Ordinance. This includes applications for authorization, upgrading, or revocation, and applications from individuals and (in some cases) bodies corporate to become shareholder controllers, directors, chief executives and alternate chief executives of authorized institutions.

In order to maintain proper checks and balances, a Banking Supervision Review Committee (BSRC) has been established to consider applications for authorization, significant cases which may result in the exercise of the major powers under the Banking Ordinance and problematic applications to become shareholder controllers, directors and chief executive under Sections 70 and 71 of the Ordinance. The BSRC is chaired by a Deputy Chief Executive and comprises senior executives of the two Banking Departments and the Legal Office of the HKMA. In 1997 one foreign bank and one deposit-taking company failed to meet the liquidity ratio under Section 102 and one restricted licence bank failed to meet the capital adequacy ratio under Section 98 of the Ordinance. All three institutions took prompt action to rectify their positions as soon as the problems were discovered. The HKMA did not have to use any of its major powers under the Banking Ordinance in 1997.

Overall, the number of work assignments completed was broadly similar to 1996 (Table 1).

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PROPERTY-RELATED LENDING

In view of the sharp rise in residential property prices and increased speculative activities, the HKMA recommended in January that a maximum loan to value ratio of 60% be adopted for "luxury?property with a value of more than $12 mn. Property-related lending, however, still grew sharply in the first nine months of the year on the back of a buoyant property market. Overheating in the residential mortgage market, combined with widespread cutting of interest rate margins as competition intensified, prompted the HKMA to write to authorized institutions again in July to remind them of the need to continue to adopt a prudent and responsible attitude to their property lending. Institutions were also reminded that they should strictly apply existing criteria, e.g. on loan to value ratio and debt servicing ratio, and that those whose property exposure was above the overall industry average of about 40% of loans should attempt to stabilize or reduce that percentage.

The HKMA also announced that it had begun monitoring institutions?property exposure on a more forward-looking basis by asking the more active participants to discuss with the HKMA in advance their plans for property lending, including the projected rate of growth.

The situation changed markedly in the fourth quarter. With property prices falling and funding costs rising, institutions became more cautious about increasing their property exposure. Mortgage rates rose, and most banks adopted a very cautious attitude towards advancing new loans. By the end of the year, however, while prices had fallen well back from the levels seen in the first half of the year, there was as yet no sign that institutions were experiencing any material deterioration in the quality of their property book. However, this is something that the HKMA will monitor very closely during 1998.

 

SHARE MARGIN FINANCING

The HKMA paid close attention to authorized institutions?exposure to the stock market throughout the year. In view of the significant growth in authorized institutions?lending to stock brokers and individuals for the purchase of shares during the first half of the year (which trend continued up to October when the market fell sharply), the HKMA conducted a review in June of authorized institutions?lending policies on share margin financing. Institutions were also requested to conduct a stress test on their share margin loans to assess the possible impact if stock prices were to fall sharply within a short period of time. The HKMA was satisfied that institutions were applying prudent loan to value ratios and effective risk management systems in providing share margin financing, and that none of the institutions would be seriously affected by a sharp fall in stock prices.

Given the reception afforded to the IPOs of two "red chip" companies in May and October, the HKMA issued a circular letter reminding authorized institutions to adhere to the HKMA's guidelines on the Financing of the Subscription of New Share Issues, in particular the requirement for a minimum margin of 10% on loans to fund share applications.

In the light of the sharp fall in the stock market in the latter part of the year, the HKMA further increased the monitoring of authorized institutions?share margin lending, focusing in particular on the risk management systems of these institutions.

The monitoring of share margin financing continues to be an important supervisory task in 1998.

 

TAXI LOANS

The value of taxi licences has risen sharply in recent years, reaching a peak of about $3.5 mn in the first half of 1997. Later in the year the value, like that of shares and property, fell sharply, ending the year at a level of $2.6 mn.

The HKMA's supervisory policy has been to ensure that those authorized institutions engaging in taxi financing - a relatively small number - have a prudent lending policy in place, including limits on their aggregate exposure and prudent loan to value ratios. The HKMA conducted a review in the latter part of the year when the value of taxi licence dropped to assess the impact on individual institutions. The results were broadly satisfactory, but the HKMA will continue to monitor how the situation develops.

 

CONTINGENCY PLANNING

As a continuation of the exercise begun in 1996, 48 institutions completed during 1997 a full review of their contingency plans for dealing with computer system and payment system failures and disasters such as a major fire. Certain weaknesses were identified in the systems of a small number of institutions. Action plans to address these weaknesses were promptly drawn up and implemented, and the exercise was completed in September 1997.

RELATIONSHIP WITH OTHER SUPERVISORS

In accordance with the Memorandum of Understanding (MOU) signed in October 1995, regular meetings between the HKMA and the Securities and Futures Commission were held to discuss issues and cases of mutual interest. The HKMA's contacts with two other overseas supervisors - the Bank of England and the New York State Banking Department - were also formalized by the signing of MOUs. The HKMA hopes to conclude other MOUs with overseas supervisors in due course, as information-sharing and other forms of co-operation between supervisors are an important means of strengthening the supervisory framework.

The HKMA continued to participate actively in regional gatherings of banking supervisors. It chairs the Executives?Meeting of East Asia and Pacific Central Banks (EMEAP) Study Group on Banking Supervision in which banking issues of common interest to members are studied. The Study Group completed the compilation of a document on the prudential supervision frameworks and practices adopted in each EMEAP economy, known as the "Green Book? Valuable knowledge and experiences in various aspects of supervision were also shared in the regular meetings of the Study Group during the year.

 

REVIEW OF REPRESENTATIVE OFFICE ACTIVITIES

The activities of representative offices are restricted to representational and liaison activities. The HKMA conducts reviews periodically to check that this is the case. Such a review was conducted during the course of the year. The review indicated that there were no significant departures f rom the permitted activities of representative offices.

 

LEGISLATIVE CHANGES

A key task for 1997 was to secure the passage and effective implementation of the Banking (Amendment) Ordinance 1997. This was enacted on 8 January and commenced full operation on 15 May. The main objective of the amendments is to introduce a legal framework for the regulation of the issue of multi-purpose stored value cards and the approval of money brokers who provide broking services in the interbank deposit and foreign exchange markets. Opportunity was also taken to streamline and improve the workings of the Banking Ordinance by consolidating the appeal and penalty provisions into a single section, and simplifying the procedures for voluntary revocation of authorized institutions and taking control of problem institutions.

Concurrent with the commencement of the new legislation, the HKMA published two detailed guidelines to explain how the Monetary Authority would exercise his functions and powers in relation to the authorization of the issue of multi-purpose stored value cards and approval of money brokers.

Stored value cards

The new legal framework provides that only licensed banks are permitted to issue multi-purpose cards which are unrestricted in terms of goods and services they can purchase. Non-bank service providers may however be authorized as a deposit-taking company whose principal business is to issue or facilitate the issue of multi-purpose cards which are more limited in scope of usage. Furthermore the new legislation provides for the Monetary Authority to grant exemption from the approval process to certain types of multi-purpose cards where the risk to the payment system and to cardholders is considered to be slight. During the year, the Monetary Authority exercised this power to exempt the Common Stored Value Ticket issued by the Mass Transit Railway Corporation (MTRC), and the "Octopus?card issued by Creative Star Ltd which is owned by a consortium of transport operators comprising MTRC, Kowloon and Canton Railway Corporation, Kowloon Motor Bus, Hong Kong and Yau Ma Tei Ferry and Citybus. Exemption was granted because these cards are used as a payment device for a very limited range of goods and services (mainly for transport and limited ancillary purposes) and the risk of their use to the payment system is considered to be slight.

Money brokers

The new legal framework introduces an authorization regime for money brokers, which basically provides that only persons who satisfy the fit and proper criteria set out in a new Schedule to the Banking Ordinance will be approved as money brokers. As the number of money brokers operating in Hong Kong is small and they do not pose significant systemic risk to the interbank foreign exchange and deposit markets, the regulatory regime introduced is relatively simple compared with that for authorized institutions. After commencement of the new legislation, the existing money brokers have all submitted their applications to the Monetary Authority within the required deadline and these will be processed in 1998.

 

CREDIT REFERENCE AGENCY

The HKMA conducted a study in late 1996 on the development of a fully-fledged credit reference agency (CRA) in Hong Kong. In summary, the HKMA considered that the development of a CRA with wide participation by authorized institutions would have two major benefits: (a) it would benefit all institutions - large and small - in terms of better informed and more accurate assessment of customers?credit standing; and (b) it would further improve the financial infrastructure in Hong Kong, thus further enhancing Hong Kong's status as an international financial centre.

In view of the above and the possibility that the asset quality of banks in Hong Kong might deteriorate as a result of the recent financial market turmoil, the HKMA considers that the development of a fully-fledged CRA in Hong Kong is both important and timely. The HKMA believes that to enable the CRA to provide useful and comprehensive credit information, it is essential that all authorized institutions should participate in sharing credit information with a CRA. The banking industry was consulted in early 1997. While the majority of institutions were in favour of the proposal, some banks remained concerned about the competitive aspects of passing on market information. In view of this, the HKMA has proposed a gradual approach with institutions contributing mainly negative information about defaults with a limited amount of positive information such as credit application data. This would be in line with the Code of Practice on the handling of consumer credit data issued by the Privacy Commissioner for Personal Data. For banks which continue to have reservations about participating in a CRA even on this limited scale, the HKMA is prepared to accept that they should participate initially only in respect of credit card information.

A letter recommending that all authorized institutions should participate in sharing credit information with a CRA on the above basis was issued in early 1998.

 

FINANCIAL DISCLOSURE

During 1997 the HKMA continued its efforts to strengthen market discipline by improving the level of financial disclosure by authorized institutions in Hong Kong. Following consultations with the two industry Associations and the Hong Kong Society of Accountants, the Best Practice Guide on Financial Disclosure by Authorized Institutions (the Guide) was revised to incorporate the recommendations in the 1997 disclosure package. The recommendations contained in the 1997 package (Table 2) are wide ranging but are primarily aimed at improving disclosure on the nature and quality of assets. The 1997 package has further enhanced the transparency of the financial position of banks in Hong Kong, which now compares well with other leading financial centres in the world.

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YEAR 2000 PROBLEM

The Year 2000 problem has been gaining an increasing amount of attention by both businesses and governments around the world. The fact that many computer systems, if left unchanged, would not function properly after the 31 December 1999 poses a significant threat to the financial community which relies heavily on computers in their delivery of services and for the processing of day-to-day operations. The failure to process transactions even for a short period of time could lead to serious consequences. Ensuring that the Year 2000 problem is properly addressed by authorized institutions was at the top of the policy agenda of the HKMA in 1997. The HKMA is concerned that there should be no disruption in bank operations as a result of systems not being able to process transactions beyond the year 2000. Accordingly, the HKMA has undertaken a number of initiatives to ensure that authorized institutions in Hong Kong take appropriate steps to address the problem well before the year 2000. The HKMA conducted two surveys and a seminar to raise the awareness of top management of authorized institutions to the threats posed by the Year 2000 problem. The results of such surveys were published in the HKMA's Quarterly Bulletin for public information. It also issued two circulars to all institutions on its expectations with respect to timing and action plans adopted by institutions to achieve Year 2000 compliance. In summary, the HKMA expects that the Year 2000 compliant systems should be in place before 31 December 1998, and that institutions should complete their internal validation work and start industry and business wide testing with all correspondents and customers preferably by the end of 1998 but in any case no later than mid-1999. The progress made by authorized institutions is being monitored as part of the HKMA's on-site examinations.

 

CODE OF BANKING PRACTICE

After extensive consultation with the banking sector and other relevant parties, the Code of Banking Practice was formally issued on 14 July 1997. The Code is issued jointly by the HKAB and the Deposit-taking Companies Association (DTCA) with the full endorsement of the HKMA. The Code sets out the minimum standards in relation to a wide range of personal banking services provided by authorized institutions including operation of accounts and loans, card services, payment services and debt collection. As in other financial centres, the Code will be subject to review and revision from time to time in the light of operational experience and market developments. The HKMA believes that the Code will help to further enhance the transparency and quality of banking services in Hong Kong as well as Hong Kong's status as an international financial centre.

 

MONEY LAUNDERING

A revised Guideline on Prevention of Money Laundering was issued in October 1997 under section 7(3) of the Banking Ordinance. It replaces the previous guideline on this subject issued in July 1993. The revised guideline has taken into account the changes in money laundering legislation since 1994. These include the enactment of the Organized and Serious Crimes Ordinance (OSCO) in 1994 which extended the money laundering offence to the proceeds of crimes other than drug t rafficking and the subsequent amendments to both OSCO and the Drug Trafficking (Recovery of Proceeds) Ordinance in 1995 which imposed a clear statutory duty to report knowledge or suspicion of money laundering transactions.

The revised guideline has also significantly strengthened the customer identification requirements, particularly in respect of shell companies, trust and nominee accounts and other types of intermediaries. These changes bring the supervisory framework in line with the latest recommendations of the Financial Action Task Force (FATF) and the practices in other international financial centres. To promote the understanding of the new guideline and the general awareness of the banking sector on this subject, the HKMA organized a seminar on the Prevention of Money Laundering on 21 November 1997 jointly with the HKAB and the DTCA. Also, the HKAB in association with the HongkongBank has produced a second edition of a training package (which includes a video tape and a booklet) for the front line staff of banks on the subject of money laundering.

 

MARKET RISKS

A market risk capital adequacy regime was implemented with effect from 31 December 1997. This regime is based on the framework set out in the Amendment to the 1988 Capital Accord issued by the Basle Committee in January 1996. The objective of the framework is to ensure that institutions hold adequate capital against the price risks to which they are exposed, particularly those arising from their trading activities. This is in addition to the existing credit risk capital requirements.

Statutory backing for the market risk capital regime was effected by an amendment to the Seventh Schedule to the Banking Ordinance which deals with the authorization criteria. The effect of this is that institutions need to satisfy the HKMA that they are holding adequate capital to support the potential loss arising from their market risk positions. Otherwise the HKMA's powers to revoke the authorization of the institution will become exercisable. This legislative amendment was supplemented by a guideline issued by the HKMA in November 1997 which sets out the details of the new regime.

The HKMA has adopted a three-tier approach in implementing the regime. The basic regime applies a standardized approach to the measurement of the required capital charge. However, those institutions which manage their market risk on the basis of internal risk management models have the alternative to adopt such models and apply capital requirements based on the value-at-risk figures generated from the models subject to the HKMA's review and approval of such models. Institutions with insignificant market risks are exempted from the regime based on the de minimis thresholds set out in the guideline.

The model review team commenced the model recognition process in late 1997. The number of institutions that have applied for or indicated their intention to adopt the internal models approach at this stage is relatively small. The detailed requirements relating to the use of internal models are separately set out in a technical paper which has been issued to institutions intending to adopt the models approach.

 

ELECTRONIC TRANSMISSION OF RETURNS

On the basis of the positive results of a feasibility study in 1996 as well as general support from the banking sector for further automation of the process of submission of banking returns, the HKMA proceeded with the design of a Submission Through Electronic Transmission (STET) system. This was completed in December 1996.

System development work proceeded in 1997. A working group involving eight institutions was formed to advise on the development process and to carry out trial runs of the system. The system development and testing works were completed successfully in November 1997.

The HKMA launched the STET system in December 1997 as scheduled. An initial batch of around 30 institutions signed up for the Phase One implementation. The system will be released to the remaining institutions in phases in early 1998.

 

CORE PRINCIPLES

The Basle Committee's Core Principles for Effective Banking Supervision were published in September 1997. They are intended to provide a set of minimum requirements for effective banking supervision and as such to serve as a basic reference for supervisory and other public authorities in all countries and internationally.

The HKMA has carried out, and published, an assessment of Hong Kong's position in relation to each of the Core Principles. The assessment revealed that all the areas identified by the Core Principles have been addressed in the Hong Kong supervisory framework and that the Hong Kong framework substantially complies with the Core Principles.

 

CHALLENGES

CONSULTANCY STUDY ON THE BANKING SECTOR

Developments such as increased globalization of markets, increased competition, innovations in financial products and the advent of new technology are bringing about significant changes to the banking industry. The implications of all these developments for the banking sector in Hong Kong need to be assessed carefully so that the HKMA can plan its response as a banking supervisor within a coherent analytical framework. In the light of this, the HKMA has commissioned a study on the future development of the banking sector in 1998. The upheavals in the regional financial markets in 1997 have also given added emphasis to the necessity and timeliness of such a study.

The study is carried out by a consulting firm and comprises two phases. Phase One of the study will evaluate the strategic outlook for the banking sector in Hong Kong over the next five years. It will also include an assessment of the costs and benefits of a number of regulatory features of the current system as well as the impact of changes to one or more of these features. Phase Two of the study will evaluate the current supervisory approach in the HKMA and consider whether it is appropriate to deal with the challenges ahead. There is however no presumption that changes to the current regulatory system or supervisory approach should, or will, be made. Rather, the study will provide a coherent framework within which such changes might be made if this were thought to be appropriate on policy grounds.

 

BANKNG (AMENDMENT) BILL 1998

The HKMA will continue to review the legal framework for banking supervision to bring it in line with the standards adopted by other major financial centres. It is hoped to introduce a new Banking (Amendment) Bill, one of whose objectives will be to make any changes thought necessary to bring Hong Kong's framework of banking supervision fully in line with the Basle Committee's Core Principles. The Bill would also provide the opportunity to introduce any further enhancements to the supervisory framework arising, for example, from the consultancy study mentioned above.

 

TRANSPARENCY OF THE BANKING SECTOR

The HKMA will continue the process of improving the disclosure framework in Hong Kong, particularly in relation to disclosure of problem loans. Consideration will also be given to requiring more frequent reporting of selected financial information by authorized institutions and also disclosure by foreign bank branches in Hong Kong of financial information in respect of their local operations in line with requirements for local banks. The HKMA will also issue a guideline to promote greater uniformity in the interest recognition policies of institutions. This would further improve the disclosure on asset quality in the published financial statements.

 

YEAR 2000 PROBLEM

Solving the Year 2000 problem in computer systems will require an enormous effort by all industries and businesses concerned. The HKMA's role over the next two years will be to ensure that this issue remains a high priority concern of the senior management of authorized institutions and that normal business is disrupted as little as possible. To this end the HKMA will continue its close monitoring of the actions taken by authorized institutions to address the problem and it will publish information about the progress made by the industry as a whole on a periodic basis. It will also maintain contact with other regulatory and international bodies in this regard and keep up to date with the latest developments both locally and overseas.

 

ELECTRONIC BANKING

Continuing technological and product innovations are of increasing importance and interest to the financial sector. These innovations include the introduction of new types of electronic money and the delivery of banking services using internet technology. Developments overseas have indicated that the use of the internet as a delivery channel for financial services has grown in importance and it is likely that Hong Kong will follow a similar path in the use of such technology. During 1997, a number of banks have already indicated that they will be launching internet banking services in 1998. The HKMA will discuss with these institutions to ensure that they have adequate procedures, controls and systems in place before they offer their services through the internet.

In order to keep up with the pace of this technological development, the HKMA established a Study Group on Electronic Banking in 1997 comprising representatives from both the banking and information technology industries. The Study Group has reviewed issues surrounding the adequacy of security for conducting banking transactions over the internet and the infrastructure which could assist in fostering the development of secure electronic banking in Hong Kong. The results of these studies will be used as a reference for developing any new policy initiatives in this regard. The HKMA's primary objective is to ensure that the regulatory framework keeps up with technological developments without stifling such innovations. It will seek to develop an appropriate policy framework to provide a sound and secure basis for the development of electronic banking in Hong Kong.

 

CODE OF BANKING PRACTICE

The Code took effect on 14 July 1997. The HKMA undertook to carry out two compliance surveys in 1998 to assess compliance by authorized institutions. The first survey, which will be conducted in February 1998, will examine whether institutions have taken appropriate steps to ensure compliance with the recommendations of the Code except those involving system changes. A second survey will be carried out in July 1998 to establish whether authorized institutions have taken all necessary actions (including system changes) to achieve full compliance with the Code.

 

MONEY LAUNDERING

Checking of controls on money laundering is a regular agenda item in the supervisory process. The HKMA will continue to monitor compliance with the provisions of the new guideline issued in 1997. In April 1998, Hong Kong will be subject to the second mutual evaluation by the FATF. This is an important exercise which helps to ensure that the Hong Kong financial sector complies with international standards in the fight against money laundering.

 

MARKET RISKS

The market risk capital adequacy framework is still evolving. In particular there are plans to harmonize the Basle Committee's framework with the Capital Adequacy Directive of the European Union which covers the same subject. The HKMA will continue to monitor the developments at the international level.

Locally the HKMA will continue to monitor the market risk exposures of institutions, their capital adequacy in this respect and their risk management systems. A specialist team from the Banking Supervision Department will continue regular treasury visits to examine the derivatives and trading activities of institutions. Rapid developments in the global financial markets and product innovations also necessitate continued upgrading of the knowledge and skills of bank examiners. Detailed and up-to-date information on the size and nature of the derivatives market is also an important input in the supervisory process. In this regard the HKMA's participation in the 1998 BIS triennial survey on foreign exchange and derivatives activities will provide timely and valuable information.

 

SUBMISSION THROUGH ELECTRONIC TRANSMISSION (STET)

Once the STET system is extended to all authorized institutions, the next step will be for the HKMA to consider deploying the private network for other communication purposes between the HKMA and the authorized institutions such as the dissemination of guidelines and circulars or for the purpose of conducting surveys with the banking industry.

 

THE ASIAN FINANCIAL TURMOIL

Despite the extremely volatile external environment caused by the financial turmoil in Asian countries and the internal shock induced by the speculative attack on the Hong Kong dollar, the Hong Kong banking sector has remained strong. This has demonstrated that Hong Kong has been working in the right direction overall in respect of the effort to improve the soundness and robustness of its banking sector. In particular, the establishment of a sound and effective legal and supervisory framework, increased transparency of the banking system, and the absence of any policy loans have contributed to the strength and resilience of the banking system. Such efforts must continue.

There are however valuable lessons to be learnt from the episode which can help to further improve the working of the banking system and strengthen it against external shocks. While a thorough evaluation can only be made after the turmoil is over, the following preliminary observations may be relevant -

  1. it is important to maintain a sound, liquid and well capitalized banking system that can withstand short-term interest rate shocks which are unavoidable under the currency board mechanism to maintain exchange rate stability. While authorized institutions in Hong Kong generally score well in these areas, it may be necessary to make further improvements even if it means sacrificing some profit growth;
  2. strong and effective prudent supervision and risk management are vital. Excessive lending to finance overheated asset markets will undermine the resilience of banks in adverse market conditions. The financial turmoil in 1997 reinforces the need for restraint in the growth in property and other asset-based lending (such as share margin financing and taxi loans) in future;
  3. banks which are mainly reliant on time deposits or the interbank market for funding need to address the interest rate risk of HIBOR-related liabilities and BLR-related assets. While the former can fluctuate widely, the latter may not adjust in tandem, thus squeezing interest margins;
  4. increased disclosure and transparency should help to reduce market uncertainty, thereby limiting the risk of unwarranted contagion. The HKMA will continue to build on the considerable progress already achieved in this area to include new measures such as increasing the disclosure of banks?non-performing loans and adopting more specific guidelines for income recognition; and
  5. liquidity management is a critical and crucial aspect of a bank's operations in a volatile market as the banking system is susceptible to the influence of market rumours regardless of whether these have any substance. A thorough and systematic review of these issues will be a top priority for the HKMA in 1998. As mentioned earlier, a consultancy study will be commissioned early in 1998 to evaluate the strategic outlook for the banking sector for the next five years. Some of the above issues may be considered as part of the consultancy study.

PROPERTY-RELATED LENDING

Close attention will continue to be paid to institutions?property-related lending, particularly in view of recent developments in the region. In order to enhance transparency and market discipline, the HKMA has recommended that from end-1997, institutions should disclose a standardized breakdown of their property lending. Further emphasis will be placed on the forward-looking approach of reviewing with the major institutions in advance their plans for property lending.

The HKMC will be fully operational during 1998. This will offer institutions the opportunity to reduce their property exposure and to free up capacity for new lending.

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