The Banking (Amendment) Bill 2005

inSight

14 Jul 2005

The Banking (Amendment) Bill 2005

The Banking (Amendment) Ordinance 2005 was passed by the Legislative Council last week, providing the legal framework for the implementation plan of Basel II.

I am most grateful to Members of the Legislative Council, in particular those who took part in the Bills Committee, for their support to the Banking (Amendment) Ordinance 2005, which was enacted on 6 July 2005. They devoted a great deal of their valuable time to scrutinising the Bill, which contained complex technical issues, over a tight time schedule. I am also grateful to members of the banking industry, particularly those who participate in the Basel II Consultation Group, for their co-operation and contributions during the fairly long and extensive consultative process leading up to the introduction of the Bill. We now have the legal framework for the implementation of Basel II and are among the first in the world to be in such a position.

Probably not all readers are familiar with what Basel II is, although by this time bankers must have developed rather special feelings for it. These feelings may include a sense of trepidation among those responsible for the hard work needed for putting the new system in place. But all agree that it is a good thing to have, especially for Hong Kong, as an international financial centre. Banks need adequate capital to support their business, which involves taking different types of risks, and there is therefore a need for quantifying the amount of capital required in relation to the risks being taken and to ensure that it is suitably sensitive to those risks. The Basel Committee on Banking Supervision, the de facto global authority in setting out the requirements for international application, has conducted a major revision to the capital adequacy standards (hence Basel II) and major banking jurisdictions, particularly those on the Basel Committee, are scheduled to move on to those standards in 2007-2008.

Readers may also be aware of the often-mentioned three pillars of Basel II. They are in fact built upon rather simple concepts: minimum regulatory capital requirements being more risk-sensitive and reflecting a wider range of risks; supervisory review of banks’ capital management, including the maintenance of higher-than-minimum levels of capital where appropriate (which has already long been the case in Hong Kong); and fostering market discipline through greater public disclosure. I believe that, particularly for a sophisticated financial centre like Hong Kong, these three pillars, forming Basel II, will contribute to greater robustness of the banking system and greater banking stability. The improvements in risk management necessary to implement Basel II will also stand the banks in good stead for future development of their business, and will contribute to the efficiency and effective working of the banking system.

The passage of the Ordinance is only a step forward, albeit an important step. Now the HKMA will need to make the necessary rules to prescribe the new methodology for calculating the capital adequacy ratio (CAR) of banks and new disclosure standards on financial information. Given the complexity of the new requirements, and with the support of the Legislative Council, the HKMA has been empowered by the Ordinance to make those rules. There are checks and balances in the Ordinance on this rule making power of ours. First, the rules will be developed in full consultation with the banking industry. Secondly, the rules will be of subsidiary legislation status and hence will be subject to negative vetting by the Legislative Council. Thirdly, if an authorized institution is aggrieved by certain decisions of the HKMA made under the rules for calculating the CAR, it will be able to apply for a review of such decisions by an independent appellate body – the Capital Adequacy Review Tribunal, which was proposed by the Bills Committee. The HKMA will continue to work closely with the banking industry in developing the rules.

Implementation of Basel II in a cross-border setting also calls for closer co-operation among supervisors in overseeing different parts of an international banking group. To streamline the implementation process, it is important to avoid duplication of supervisory efforts and harmonise differences in the approaches adopted by home and host supervisors wherever possible. The HKMA will continue to collaborate with its supervisory counterparts through the exchange of views and experience on relevant practical issues in the implementation process.

Hong Kong will be among the first of the non-Basel Committee members to implement Basel II. We are confident that the implementation of Basel II will further strengthen the safety and soundness of the banking system in Hong Kong and help maintain Hong Kong’s position as a leading international financial centre. But at the same time, we are aware of the risk of over-regulation and of adding to the cost burden of the banking sector. So we are doing our best to tailor these international standards to the particular circumstances of Hong Kong, which is why we place so much importance on the advice of the banking industry, and of the Legislative Council. The aim should be to maximise the benefits for Hong Kong, while minimising the costs.

 

Joseph Yam

14 July 2005

 

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