Effective banking supervision requires taking a larger view of the industry than simply focussing on the ability of borrower to repay.
The HKMA is tasked with the responsibility of regulating banking business and the business of taking deposits, and of supervising authorized institutions in Hong Kong. The Banking Ordinance gives us the authority for doing so in order to provide a measure of protection to depositors, and to promote the general stability and effective working of the banking system. In our approach to this task, we have always adopted the attitude that we work in partnership with the banking community. We recognise that it is for the banks to conduct banking business and not for the supervisor, and we do leave the banks entirely to take commercial decisions on what banking services to provide and at what price. Sometimes we might even go as far as to encourage banks to take risks, provided that they are in a position to manage those risks prudently. Banking business is, in part, risk business, and the willingness of the banks to take risks ensures that the banking system's pivotal role in financial intermediation is effectively performed for the benefit of the community.
But the proper management of risks requires a clear understanding of the nature of the risks concerned, and the circumstances and probability of their materialising. And this often goes well beyond the narrow confines of traditional banking, in which there is undivided focus on the adequacy of cash flow and of collateral as the prime determinants of the borrower's ability to repay. It involves, among other things, an understanding of the changing characteristics of international finance and the continuing reform of the international financial architecture, within which Hong Kong, as an entirely open international financial centre, operates. It involves an appreciation of the structural characteristics of the Hong Kong economy, its macro-economic conditions, and its outlook. It also involves, perhaps crucially, in-depth knowledge of the structure of our monetary and financial systems, their vulnerabilities, and how they respond to shocks that often come without much warning.
As supervisors, we have a special interest in the adequacy of the attention given by the banks that we supervise to the identification and assessment of the risks arising from these macro areas. Inevitably, given the uncertainties inherent in these areas, the perceptions of the risks involved differ (thankfully only occasionally), and consequently the opinions on the manner in which they should be managed also differ between the supervisor and the banks. Differences of opinion may also arise when our discussions go beyond risk management into the provision of safety nets for depositors (such as deposit insurance) and the protection of consumers that make use of banking services (the role of the HKMA in consumer protection). Be that as it may, it is our duty as supervisor to try and put our points of view across objectively and, where appropriate, have them translated into statutory requirements or supervisory guidelines or self imposed rules by the industry, after due consultation.
In the process, we sometimes have to be firmer than usual in our insistence on a particular supervisory approach, to the extent that individual banks - very much the minority - may feel constrained by our action - and possibly aggrieved - from pursuing their all important objective of maximising shareholder value. We may consequently be blamed as the culprit causing the disruption brought about by the changes to both the banks and the bank customers. Our stance on deregulation and the promotion of corporate fitness through exposure of banks from their captive environment to greater competition is a case in point. But, by and large, as experience in the past has shown, consensus can be reached through reasoned consultation.
And it is understandable, I hope, that in the performance of our supervisory task in a rapidly changing financial environment, characterised by globalisation and technological revolution, we often have to ask for information as input for the analyses needed to support our initiatives. I realise that the burden on the banks of providing information to the HKMA has increased over the years, but this is all for a good purpose. And I am sure that a progressive bank would have made used of new information technology to upgrade their management information systems to enable them to monitor the areas of business most likely to expose themselves to risks. We expect this from fit and proper bank executives, although, certainly, in asking for information from banks, we also realise that we need to ensure that it is really necessary, and that the request is reasonable.
We now face important challenges. I am confident that, working in partnership with the banking community, these challenges will be turned into attractive opportunities and we shall continue to have a stable banking system that works effectively for the benefit of Hong Kong.
Joseph Yam
22 March 2001
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