Deposit Protection

inSight

26 Oct 2000

Deposit Protection

Hong Kong has one of the soundest and best capitalised banking systems in the world. But globalisation, and the risks and uncertainties that it brings to small and open economies, prompts the question of whether greater protection should be extended to depositors and to the system as a whole - against the unlikely event that a bank should fail.

In the preamble of the Banking Ordinance, a number of objectives are specified. These include, among others, the need to provide a measure of protection to depositors and to promote the general stability and effective working of the banking system. The HKMA is entrusted with the task to achieve these objectives, making use of the powers spelt out in the Banking Ordinance and other related legislation. We in the HKMA take this responsibility seriously. To discharge this responsibility effectively, we have developed a habit of frequently asking ourselves whether or not, in the light of changing circumstances, we continue to be in a position to deliver what is required of us.

The external environment has certainly been changing rapidly. While globalisation has contributed much to world growth and development, benefiting in particular those economies with the most market-oriented capitalist structures, it has also brought tremendous risks, which the small and open markets have found difficult to manage. The outbreak of financial turmoil in emerging markets in recent years, although partly a reflection of domestic problems, was a vivid reflection of the potency of international finance under the influence of globalisation. International discussions on the reform of the international financial architecture have been dominated by the views of the large economies. These views naturally reflect their own concerns, and the plight of the small open markets is relevant only to the extent that the large markets, through contagion or other means, are adversely affected. Although many suggestions have been put forward, they do not adequately address the problems faced by small open markets, specifically the possibility that they could be destabilised by the volatility of international capital to such an extent that the viability of their financial systems could be put in danger.

So, small open markets have to fend for themselves. They need to pursue macroeconomic policies that are considered prudent, not only to their own people, but also to international investors. They need to strengthen their market structures, particularly in respect of their financial markets, and bring supervisory and disclosure standards into line with the standards familiar to international investors. These have long been cardinal features of the practice in Hong Kong, as our impressive economic achievement and our stature as a reputable international financial centre attest. Being in that position has helped Hong Kong to cope with the financial turmoil that swept through Asia and beyond in 1997-1998. Although we have done reasonably well, with our currency remaining intact and our banking system remaining robust, we had to take unusual and controversial actions.

Licensed banks in Hong Kong are well run, working in partnership with the supervisory authority. They are highly liquid. Those incorporated in Hong Kong are all well capitalised to an average of more than double the international minimum requirements in terms of capital adequacy ratio. The quality of their assets is high by international standards and, notwithstanding the intense competition among themselves, they are making profits. They operate within one of the most robust financial infrastructures of the world, characterised by a payment and settlement system that effectively limits the risk of contagion if problems should occur.

But we should not be complacent. The fact that our banking system has survived the recent crisis of globalisation unscathed does not mean that we can relax. International finance, under the continuing influence of globalisation, will bring opportunities and risks. As an international financial centre, we need to do our best to harness this potent force to exploit the opportunities and manage the risks. The banking system has a vital role to play in all this, and, notwithstanding its current position of strength, problems will arise from time to time as the harsh facts of competition and progress sink in. Even with the best supervisory system in the world, and unashamedly I can say that we do have a good one, we cannot guarantee that the unexpected will not happen. But what we can do, consistent with the objectives of the Banking Ordinance, is to try our best to ensure that, if problems occur, a measure of protection is provided to depositors, and that the general stability and effective working of the banking system is maintained. Our habit of asking ourselves whether we are in a position to do so has led us to explore whether a safety net, particularly for those depositors not well equipped to protect themselves, in the form of a deposit insurance scheme, is now appropriate. A consultation paper has just been published. This is a matter of direct concern to the community. The HKMA maintains an open view on this subject: we shall make recommendations to the Government taking into account views received during the consultation exercise now in progress. We would be most grateful for your views.

Joseph Yam
26 October 2000

More information on Enhancing Deposit Protection in Hong Kong can be found here.

Click here for previous articles in this column.

Document in Word format

Latest inSight
Last revision date : 26 October 2000