The Banking Ordinance is a complex statute of some 200 pages and it has been much amended since its original enactment in the 1960s. The mandate of the HKMA is, however, set out very plainly in section 7(1) of the Ordinance, which states that:  BIS Review 39/2002  1  "The principal function of the Monetary Authority under this Ordinance shall be to promote the general stability and effective working of the banking system." We pursue this mandate through licensing criteria and ongoing supervision of banks. We complement this supervisory work with a variety of initiatives under the banking reform and other programmes, the ultimate intention of which is to promote general stability and effective working of the system. For example: •  First, the deposit insurance scheme, now at the detailed planning stage, will promote the general stability of the system by protecting individual depositors up to a certain limit. •  Secondly, the Commercial Credit Reference Agency, which is expected to be launched as a voluntary, market-based scheme in the not-too-distant future, will promote the effective working of the system - and the larger economy - by helping banks channel lending to creditworthy small enterprises. •  Thirdly, public consultation by the Privacy Commission will soon commence on broad proposals for the sharing of positive consumer credit data - a facility which, when and if it is introduced, will help in addressing an issue of concern to banking stability: the dramatic rise in consumer defaults and personal bankruptcies.

This suggests that, at least in this sample, imposing a small number of regulatory constraints can achieve the same hit rate as any singular constraint, but at a materially lower societal and regulatory cost, as measured by levels of capital and liquidity and/or regulatory false alarms. Intuitively, these results broadly accord with the conceptual discussion. A regulatory portfolio can help when insuring against multiple sources of risk and myriad sources of uncertainty. It also accords with what we know from various individual case studies of bank failure during the global financial crisis: some banks failed because they were over-leveraged, others because their assets were excessively risky, others still because they undertook too much maturity transformation. Because these fault-lines were, for some banks, reasonably well-correlated – their risk management was poor across all dimensions – individual regulatory metrics performed fairly well in identifying these banks prior to them failing. But some banks’ risk-management failings were singular, not plural. Their risk blind-spots were idiosyncratic and uncorrelated. By using a portfolio of regulatory stress metrics, it is possible to isolate those banks which were risk-management outliers in one, but not all, dimensions. Consider two very different banks which failed during the global financial crisis. American bank Countrywide had a leverage ratio of 7.7% and a risk-weighted capital ratio of 11.6% at the end of 2006. Even if capital regulation had been much tougher in 2006, it may not have been required to raise capital. But its NSFR was just 0.76, indicative of the structural liquidity risk it was undertaking.