The Financial Stability Forum met in Hong Kong last week. Its discussions on two current issues - Argentina and Enron - are worth paying attention to.
Early last week the HKMA hosted the seventh meeting of the Financial Stability Forum. Readers can access the Forum's website (www.fsforum.org) if they wish to know more about what the Forum does. If you have an interest in issues that have a bearing on global financial stability and how the associated risks are being managed, the website is highly recommended. The Forum is now recognised as the place for these issues to be discussed and for international co-operative efforts to be initiated. I am glad, and honoured, to be serving as a member of this important Forum. The involvement certainly helps me in setting priorities in the HKMA as we continue to cope with the increasingly potent forces of international finance under globalisation.
At the meeting last week there were two issues on which the sentiment of the many people I talked to was significantly different from my expectations. The first was a rather pleasant one, and this is that while Argentina continues to be a matter of great concern internationally it has become rather irrelevant to Hong Kong. All felt that the market was capable of distinguishing between Hong Kong and Argentina, notwithstanding the similarities in monetary arrangements that the two economies once shared. In fact, now that Argentina has, in a way, conceded that it did not have the flexibility to cope with, or the resolve to observe the discipline of, a currency board system, and has moved away from it, there is no similarity whatsoever between Hong Kong and Argentina. Around the meeting, there was, in fact, even surprise expressed by some at the attention being paid in Hong Kong to events in Argentina. Thank goodness, I can now strike Argentina off my priority list of risks and vulnerabilities specific to Hong Kong.
The other issue concerns the implications and the lessons to be learnt form the collapse of Enron. What was well beyond my expectation was the seriousness with which the regulators are approaching the matter - a matter portrayed so far as an isolated incident that did not have systemic consequences. Much of the discussion during the two-day meeting centred on this issue. Even the continued weakness of the Japanese economy and the possible implications for the yen and for financial stability in the region paled in significance. Much emphasis was given to the adverse effects of high-profile corporate failures on confidence and trust in market integrity. Years of financial euphoria, characterised by increasingly complex capital market and corporate finance practices, have created weakness in market structures and have allowed them to be concealed. Standards governing key components of well-functioning markets - corporate governance, accounting, auditing, public disclosure and external monitoring - have simply failed to keep up. As a result, inadequate old rules have been exploited and new conflict of interests arising from new market practices have been ignored.
I am impressed by the speed with which remedial proposals have been put on the table for discussion and the comprehensiveness of them. I am sure many of these proposals will be expeditiously translated into new or improved standards to be observed by those concerned. There was a high degree of consensus as well as a shared sense of urgency on this. As an international financial centre, Hong Kong must ensure that we are at the forefront of this important international reform initiative in market structure. Indeed, our involvement in this process, through membership of the Forum and through our contribution to discussion in the individual international standard setting bodies, will facilitate this.
Joseph Yam
4 April 2002
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