The purists would say no to this, but they should really come down to earth and recognize that in modern day finance the majority of transactions are conducted electronically without the use of cash. For the effective operation of currency board arrangements, the organisation responsible for running the system has to manage the electronic interbank clearing system as well. This requires that the banks operate clearing accounts with the currency board and that the aggregate of the balances in their clearing accounts forms the crucial part of the monetary base which is subject to the monetary rule of the currency board. This puts the responsibility for the provision of liquidity to the banking system squarely on the currency board. But this arrangement need not involve any significant departure from the discipline of currency board arrangements. The important issue is how liquidity for the purpose of facilitating the clearing of interbank transactions is provided. In Hong Kong this is provided through the repurchase of debt issued by the currency board and fully backed by foreign reserves. There is therefore no departure from the discipline of currency board arrangements. The fourth accusation is that we were too late in introducing our technical measures to strengthen our currency board arrangements and that had we done so earlier we could have avoided having to intervene in the stock market. Frankly, I do not think that we could have turned around the market sentiment with just part of the package of actions.

This should lead us to reflect on how we can increase the macroprudential space available, thereby extending the capacity to mitigate the effects of future crises, both those originating in macrofinancial disequilibria that are endogenous in the economy and those arising from factors exogenous to the financial sector. Some national authorities, in countries such as the United Kingdom, have added flexibility to the implementation of the original CCyB framework developed by the BCBS to require the accumulation of a countercyclical capital buffer in the absence of warnings about systemic imbalances based on the credit-to-GDP gap metric. It would suffice for the economy not to be in a recessionary environment to call for a positive CCyB that can be released when any shock leading GDP to stand below its potential should materialise. Events surrounding the COVID-19 shock, from a source completely external to the financial system, have demonstrated the goodness of this approach in the use of the CCyB. This discussion has a bearing on other matters, such as the optimum level of capital that banks should maintain, and the most suitable composition of this capital: structural requirements versus cyclical/releasable requirements, microprudential requirements versus macroprudential requirements, and discretionality versus rules. It is, therefore, a complex discussion requiring detailed analyses well-grounded in empirical and theoretical evidence. Second, I would like to stress that we must also reflect in the coming years on the development of macroprudential policy for the so-called “non-bank segment” of the financial system, i.e. in the area of securities markets and insurance companies.