Joseph Yam, JP: The Hong Kong Monetary Authority's main initiatives in the
area of banking supervision
Speech by Mr Joseph Yam, JP, Chief Executive of the Hong Kong Monetary Authority (HKMA), at a
lunch with representatives of the Finance Constituency organised by Dr David Li, held in Hong Kong
on 15 January 2001.
The speech outlines the latest state of play on the HKMA's current initiatives in the area of banking
supervision, as well as responding to some points raised by Dr Li on behalf of the Finance
Constituency.
* * *
1. I would like to thank David Li for arranging today's lunch with representatives of the Finance
Constituency. The number of live issues in the realm of bank supervision, some of which have
been set down in David's letter in advance of this lunch, is currently quite considerable, so it is
useful to have this opportunity to get together to exchange views. As you will know, it is very much
our style to work in close collaboration with the banking industry on developing our policies rather
than to adopt a confrontational approach, and long may this continue.
2. Let me run through what I see as the HKMA's main initiatives in the bank supervision area in the
next twelve months, in the course of which I will try to pick up some of the points made in David's
letter. I see there being three main initiatives, namely:
1. deposit protection;
2. deregulation and other market reforms; and
3. the credit reference agency.
3. On deposit protection, we are now coming to the end of the consultation period on the consultants
report - in fact there are just two days left, so if you want to make a submission, you will have to
hurry! Once we have collected in everyone's comments we will carefully review them and
determine whether to recommend going ahead with such a scheme and, if so, exactly how it
should be structured. As you will be very aware, the views of the banks on this issue are mixed,
whereas LegCo has given a clear endorsement, and most other parties are also in favour. But,
assuming we do go ahead, this is really only the beginning, and there will be a lot of work to be
done on the design features. For example, should coverage of the scheme be limited to $100,000,
or should it be $200,000? Should funding be ex-ante or ex-post? Should premiums be risk-based?
None of these issues have been decided yet, so we welcome any constructive comments and will
certainly consider them carefully.
4. One particular question that has been raised is whether deposits with RLBs and DTCs should be
covered. The consultant suggested not, primarily on the grounds that excluding them would be
consistent with the institutional coverage of the current priority claims provisions. Moreover, the
aim of deposit protection is to protect small retail depositors, i.e. depositors with deposits of less
than $100,000, and DTCs and RLB do not have such depositors. However, the issue of whether
their exclusion from coverage might adversely affect the business of RLBs and DTCs needs to be
considered. Certainly one might argue that as the first $100,000 of deposits of over $100,000 with
licensed banks would be covered, the same should apply to deposits with RLBs and DTCs. This is
something that we will consider further in the light of the views that have been expressed.
5. Moving on to the issue of deregulation, July, of course, will see the full abolition of controls on
interest rates. This is highly significant, as such controls are surely inimical to Hong Kong's free
competition ethos. Certainly this change in the status quo will provide certain challenges for
institutions, but in the long run the competition, innovation and efficiency that the removal of such
barriers will engender will help to keep Hong Kong's banking sector competitive and profitable. We
also, as you know, hold the view that some greater consolidation among the local banks would be
desirable from this point of view, although we have not forced the issue. This is something,
however, to which we would urge bank owners to give careful thought.
6. It is clear that as part of the process of deregulation of interest rates banks will be considering
revising certain fees and charges. This, of course, is understandable. If deregulation is to improve
competition and efficiency, banks must be free to adjust their pricing not just on interest rates but
also on fees and charges. I have absolutely no argument with this. However, I very much hope
that banks will display some sensitivity on this, and will bear in mind the public interest. They
should also ensure that their pricing is transparent, and that customers have good notice of any
changes.
7. In addition to interest rate deregulation, there are a number of other market reform measures
originating from the consultancy report published a year or so ago which are still being
progressed. For example, later this year we will consider whether there should be some further
relaxation of the restriction on the opening of branches by foreign banks which have entered the
market since 1978. We also plan to review whether the three-tier system of authorisation might be
reduced to two tiers, although we do not plan to visit this issue until next year - i.e. 2002 - and
have quite an open mind on this. This is rather later than we originally intended. But it reflects the
fact that we believe that the present system is working reasonably well and that there is no
pressing need to change. We are also heavily preoccupied with deposit insurance and the
outcome of that exercise may influence the way in which the three tier structure is modified - most
obviously, whether the deposit threshold for DTCs should continue to be set at $100,000.
8. Also on the back burner for the time being is consideration of whether there should be any change
to the minimum paid-up capital requirements for locally-incorporated AIs. This obviously is tied in
to some extent with the reform of the three-tier structure, as if we did amalgamate the RLBs and
DTCs into a single class we would have to decide what the minimum paid-up capital requirement
for the class should be. This is something we will have to consider in due course, but we are of
course well aware that a higher requirement would have implications for some of the smaller
DTCs, and we will certainly have regard to this. Aside from any change related to the reform of the
three-tier structure, we don't at present have any other plans in relation to the minimum capital
requirements, although at some point we may want to consider updating them in line with inflation.
9. On the third initiative I mentioned, the credit reference agency, some of you may know that we
have established a working group to take this initiative further. The consultation we conducted
indicated that there was quite widespead support for such an agency, although having said that it
is fair to say that there was quite a diversity of opinion on various aspects. The working group will
investigate this further and try to arrive at a recommended way forward. But we hope that
something can be done in this area, as most seem to agree that such an agency would be
beneficial.
10. So that brings me to the end of what I see as the three main initiatives, but let me also comment
on a few other outstanding matters. First is the vexed question of the approval of managers. I
must confess we have been a little taken aback by some of the reaction to this proposal, which
seems to question our motives for seeking such a power. All I can say is that we have no ulterior
motives. We simply feel that if individuals are to fill important positions in banks then steps should
be taken to ensure that they are fit and proper for the position. Clearly it is the banks' responsibility
to select individuals and satisfy themselves as to their credentials, and you can be assured that
we have absolutely no desire to second-guess these decisions. However, it is a fact that we may,
on occasion, have access to information on an individual which the bank does not have. We would
see ourselves, therefore, as acting as very much a second line of defence - and only in
exceptional cases. A number of banks see the logic in this and support our proposals. Others
remain less enthusiastic. But we are consulting the industry further on this and I hope that
something that is acceptable to all can be arrived at.
11. Next is the issue of the review of the Code of Banking Practice, in relation to which it is suggested
in David's letter that some people are unhappy about the stance taken by the HKMA. On this, I am
afraid, I have rather less sympathy than on other issues with those who raise concerns. I do not
believe that any of the changes promoted in the Working Group, such as in relation to credit cards
and also to fees and charges, are unreasonable. Indeed, most banks seem to have accepted the
rationale for changes such as the $500 card loss limit, which brings Hong Kong into line with
international practice. I believe that the banks must appreciate that issues relating to terms and
conditions and other aspects of customer service are a legitimate matter of public interest and
concern. In the past, it is true, the HKMA has not been as closely involved in consumer matters.
This, however, is something that is changing, not because we particularly desire it but because it
seems to be what the public expect. We plan, therefore, to review our involvement in this area so
as to determine exactly what our role should be.
12. Finally, there have been concerns expressed that the HKMA's supervision has become more
intrusive and that requests for information are sometimes excessive. This is certainly something
we are aware of, however I should point out that we don't ask for information just for the sake of it.
If we ask for some new information, or for an institution to increase the frequency of its reporting,
there is always a very good reason for it. I know that we asked for a lot of additional information,
particularly following the onset of the Asian financial crisis, but I make no apology for this, as I can
assure you it was necessary for our monitoring of the banking sector, and of individual institutions,
through the crisis. But having said that, we are of course very well aware of the burden that this
places on institutions, and can assure you that we will continue to keep our information
requirements under review with this in mind. We are also aware of the need to ensure that our
staff deal with the banks with the appropriate degree of sensitivity, that they only make requests
which are reasonable, and that they try to explain why particular things are required. This is quite
a challenge for us, but it is something we must work on nevertheless.
13. This brings me to the end of my remarks. I have not said anything on the bankruptcy laws or tax
issues, which were two issues I was asked to addresss, but I don't think there is much I can say
on these areas except that we appreciate the banks' views and will reflect these to the appropriate
authorities as appropriate. Certainly we are aware of the rising trend in personal bankruptcies and
the possible impact of this on delinquencies, and this is something we are watching closely. We
are also in dialogue with the Privacy Commissioner and other parties to try to get the scope of the
credit data that can be released to credit agencies increased, which would perhaps help in this
area.
14. I hope these comments have been of interest to you all. Let me end on a positive note. We are all
part of a highly successful industry here in Hong Kong. As banking regulator, it is the HKMA's
objective to promote a safe and stable banking system. To achieve this we need the banking
industry to be successful, profitable, competitive, innovative, and responsive to change, and this
surely is your objective too. So let's continue to work together on initiatives such as those I have
discussed today so as to ensure the continued prosperity of our industry.
15. Thank you.