The financial stability in Hong Kong

inSight

03 Jul 2008

The financial stability in Hong Kong

New York and London are reviewing their financial-stability arrangements: this may be a good time to take another look at our own.

One area to which the financial authorities in the developed markets have been devoting attention, as a response to the continuing financial turmoil, is the establishment of an effective framework for financial stability. The authorities in the US and the UK, where the top two international financial centres reside, have taken the view that their central banks can play a greater role. The US Treasury Blueprint published in March, as a long-term plan for reforming the financial regulatory structure, suggested that the Federal Reserve should be given responsibility for financial-market stability. More recently in June the Chancellor of the Exchequer announced his intention to strengthen the role of the Bank of England in relation to financial stability through new legislation that is scheduled for introduction in the spring of 2009, including the establishment of a Financial Stability Committee.

While crisis-induced reform does not necessarily produce the best regulatory model, the lack of a financial crisis is no excuse for not doing anything. As the third leg of "Nylonkong"1, financial stability in Hong Kong is of great importance, not just in ensuring effective financial intermediation domestically, but also internationally, since international investors and fund raisers rely on our financial platform to conduct their business. We therefore need to satisfy ourselves that, having regard to our own characteristics and the anticipated changes to the financial-stability frameworks of the other two legs of "Nylonkong", we are in a position to deliver financial stability. In fact, our openness, our small size and our lack of a captive economic hinterland that naturally subscribes to our financial services make this task significantly more difficult for us than it is for the others. We simply cannot afford to be complacent.

Thankfully, we do have a fairly robust framework that has been built up over a relatively short period. Some of the changes were, indeed, crisis induced, but many demonstrated foresight. The overall responsibility for financial stability (and other aspects of the monetary and financial systems) rests with the Financial Secretary, and he is assisted by the Secretary for Financial Services and the Treasury in making policies for the maintenance of the stability and integrity of the financial system of Hong Kong. In support of these policies, the Monetary Authority has a list of well defined responsibilities focussing largely on the operations of the banking system. Although many of these arrangements are not spelt out in legislation, they have been clearly and transparently laid out, notably in a statement by the Chief Executive of the HKSAR on 27 June 2003 on the responsibilities of the Financial Secretary and the Secretary for Financial Services and the Treasury, a statement by the Financial Secretary on the same date setting out his policy objectives in relation to the financial system, among other things, and an exchange of letters on 25 June 2003 between the Financial Secretary and the Monetary Authority setting out the division of functions and responsibilities between them in monetary and financial affairs. There is also a Financial Stability Committee that has been in operation for some time, chaired by the Secretary for Financial Services and the Treasury, although unlike the proposal by the Chancellor of the Exchequer, this is not a committee of the central banking institution but of the government.

But this is not to say that there is no scope for improvement. I think there is a need for us to examine in detail the financial-reform agendas of other jurisdictions and monitor developments on this front closely. For example, although Hong Kong already has a framework for the provision of liquidity to the financial system when it is under stress, similar to what is being envisaged in the proposed reform measures in the US and UK, there is always scope for refinement, at both the policy and operational levels. Without suggesting that the existing arrangements are in any way inadequate, questions can be asked about whether the established liquidity-support mechanism for the banking system should be extended to other institutions crucial to the systemic stability of the financial system, or whether the provision of liquidity should continue to be dealt with case by case. Furthermore, while the Financial Secretary, under the Exchange Fund Ordinance, “may, with a view to maintaining Hong Kong as an international financial centre, use the Fund as he thinks fit to maintain the stability and integrity of the monetary and financial systems of Hong Kong”, there is also the question of whether this constrains the ability of the Financial Secretary to deliver financial stability when he faces an issue that is not expected to affect the status of Hong Kong as an international financial centre yet has financial-stability implications.

Joseph Yam
3 July 2008

1 A term referring to New York, London and Hong Kong from an article entitled "A Tale of Three Cities" published on 17 January 2008 in TIME Magazine.

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