No fundamental deficiencies have been identified, but there is always room for improvement.
Readers may recall that, in an earlier Viewpoint, I wrote that the best of times is the best time to take stock. To put it another way: in fair weather prepare for foul. We try to make this a habit at the HKMA. We prefer to anticipate problems, wherever possible, rather than having to tackle them when they erupt and learn lessons the hard way. Prevention is always better than cure, although the efforts spent in preventing crises, if successful, are often overlooked. In the middle of last year, we had all been enjoying four years of strong economic recovery since the occurrence of SARS in the second quarter of 2003. Everything seemed to be going well, domestically and globally. I remember repeatedly hearing the word "benign" during international meetings on global finance. But I always felt a bit sceptical about it.
It was then that the urge to take stock in the good times strengthened. Against the background of a surge in asset prices under the influence of low interest rates and with inflation edging up, we initiated a review on banking stability in Hong Kong, in particular on our own approach to this important area of our responsibility. Almost all of the banking-reform recommendations of the last review conducted in 1998, and some additional measures, had been implemented. Major banking-reform initiatives in recent years include the removal of the Interest Rate Rules, the implementation of Basel II, the establishment of a Commercial Credit Reference Agency and the introduction of the Deposit Protection Scheme. To make sure that we had not overlooked other risks that might have evolved while we were busy implementing these reforms, another stock-take of challenges lying ahead of us seemed in order.
We started making preparations for such a review in the second quarter of last year, drafting terms of reference, identifying a suitable consultant, holding preliminary discussions and seeking the necessary advice from the Exchange Fund Advisory Committee. By the time all these were completed, the Panel on Financial Affairs of the Legislative Council briefed, and David Carse appointed as the consultant for the Review, we were already in the fourth quarter of the year after the sub-prime crisis in the United States broke. It therefore made sense for the Review to include the lessons of the crisis and the implications for Hong Kong.
Readers will have noticed the publication of the consultant's report last week entitled Review of the Hong Kong Monetary Authority's Work on Banking Stability. I am pleased to note the consultant's comment that "no fundamental deficiencies in the current regulatory and supervisory framework and processes have been identified", although, as I expected, "there are a number of areas where enhancements can be made" which will provide an even sounder foundation to cope with the challenges ahead. Indeed, I would be quite surprised if there were no areas for improvement.
The Review contains 75 recommendations in seven areas:
Trends and issues (28)
Governance issues relevant to banking stability (6)
The Monetary Authority's functions and powers in the Banking Ordinance (8)
The supervisory framework (18)
The policy framework (9)
Authorization (4)
Safety net arrangements (2)
We in the HKMA will study these recommendations carefully and form a view on whether and how they can be implemented. There will be a need for wide consultation, particularly with those in the banking industry, and I encourage all concerned to send in their comments. We will be very happy to receive them. I am sure the Panel on Financial Affairs of the Legislative Council will also have a keen interest in these recommendations, not least because some of them require amendments to the Banking Ordinance. The consultant has already given an advance briefing to Members of the Panel on the day when the Report was published. He has also agreed to formally brief the Panel on the Review in the 2008/09 legislative session.
Joseph Yam
24 July 2008
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