Contingency planning

inSight

03 Apr 2003

Contingency planning

Yesterday the HKMA issued a circular to banks on precautions and contingency plans to deal with the outbreak of atypical pneumonia. For banks - and for the HKMA - these plans involve back-up sites and special staffing arrangements.

I firmly believe that contingency planning is a vital part of our lives, whatever capacity we are in. This is particularly so in a rapidly changing environment, where opportunities and risks present themselves in abundance. It is all too often that we are dazzled, shocked or mesmerised by change into the familiar but dangerous state of inability to respond in our best interest.

At the risk of stating the obvious, the world is forever changing. But the changes that have been taking place recently are of particular significance - ones that are seen only in decades, notably the revolution of information technology and globalisation. Being so externally oriented, Hong Kong has been more affected than most other economies by these changes. And there are also profound changes that are specific to Hong Kong - the resumption in the exercise of China's sovereignty over Hong Kong, the transition from colonial rule to "one country, two systems", the thorny evolution of the domestic political system, and the rapid integration with the Mainland. All these changes, global as well as Hong Kong-specific, have social and economic implications and consequences that few of us have experienced before, let alone managed. But manage them we must, and contingency planning is an essential part of survival.

In a market-based economy, each economic entity, operating under its own profit motive, should clearly make sure, as far as possible and among other things, that it can survive and continue to function, and therefore make profit, against unexpected shocks. This is quite different from managing the risks of the business itself, for example credit risk, interest rate risk, exchange rate risk, and so on, for a bank. This is the unexpected shock that may be totally unrelated to the business itself. Although unexpected shocks are by definition of unknown characteristics, contingency planning against a shock of this unknown nature often takes the form of what is called a business continuity plan. And the common features of such a plan are a "warm" back-up site that can be turned "hot" with the minimum of time lag, and, learning from the experience of the terrorist attack in New York on 11 September 2001, a back-up team as well, for essential operations.

A back-up team for essential operations has, understandably, proven to be a rather difficult undertaking, particularly for small institutions, in view of the additional staff costs involved and the perceived low probability of disruption. In banks, for example, the essential operation may be the dealing and settlement functions, where they are in a concentrated, and in most cases single, location, and staffed by individuals with specialised skills. Recent independent events - terrorist and atypical pneumonia attacks - have in my opinion suggested that the probability of disruption immobilising the team and making the location unsuitable for access is not as low as was once commonly perceived, even with historically conservative margins built in.

While the significant cost implications of keeping a back-up team are prohibitively high by reference to the competitively compressed profit margins currently available in the financial industry generally, there is always room for improvement before it is too late. The specific measures that can be taken depend very much on the particular circumstances of individual institutions and it is very difficult to generalise or provide general guidance. Insofar as the HKMA is concerned, we do have operations that are essential, not only to us, but also to the whole financial system of Hong Kong. Contingency planning require us to promote a human resources policy that enables staff to acquire a wider spectrum of skills through posting rotation rather than to specialise to the extent of becoming indispensable. The amalgamation of the functions of banking supervision and monetary (including reserves) management, made possible by the formation of the HKMA, made this possible to a considerable degree, on top of the much needed widening of exposure that was essential for enhancing efficiency in central banking. Early last week, therefore, we were able to split up the existing teams responsible for essential operations and have them working from both the normal and the back-up locations, just in case the "attack" necessitated the immobilisation of any of the normal locations, even for a short while.

 

Joseph Yam

3 April 2003

 

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Last revision date : 03 April 2003