help of the imf and the world bank. these include tighter limits on loan growth and on lending to sectors such as property ; tightening of the loan classification framework and provisioning requirements ; more disclosure of non - performing loans ; strengthening of on - site examination to introduce a more risk - based approach ; and enhanced legal powers for the supervisors to take prompt action to deal with problem banks. in a number of countries, problem banks and finance companies have been closed down or are being merged and efforts are being made to realize as much value as possible from their bad assets. from my discussions with my supervisory colleagues in the region i know that they are serious in their efforts and i wish them every success. the lessons for hong kong 16. this sentiment recognizes that it is also in hong kong ’ s interest that financial stability returns to the region. as i have already indicated, one of the special features of the asian disease is that it has been extremely contagious. and although the hong kong economy and financial system have remained in pretty good health, they have not been totally immune. this suggests that we too have lessons to learn from the crisis. 17. hong kong ’ s supervisory system does indeed compare well with international standards. a review which we conducted last year showed that we had addressed all the areas covered by the basle committee ’ s core principles and that we fully complied with all but a few of them. in the latter cases, we are in partial compliance. this does not however mean that we can be complacent for the following reasons : • first, the basle core principles are, as i have indicated, minimum standards and we should where possible be aiming for best practice • second, the environment being faced by banks is changing at an accelerating rate and we need to be sure that our supervisory system keeps pace with this • third, even our robust monetary system can be subject to external shocks and the banks need to take this into account in the way in which they manage their business. [UNK] 18. the latter point needs some further elaboration. as you will be aware, hong kong ’ s monetary policy is built around exchange rate stability in the form of the link between the hong kong dollar and the us dollar. this is backed up by the currency board system which requires the monetary base of the banking sector - the notes and coins in circulation and the clearing balances held with the hkma - to be fully backed by foreign currency. when the hong kong dollar is under pressure as

policies and by the fact that much of their property exposure is related to the residential market. notwithstanding the good outcome so far, we believe that the asian crisis has reinforced the need for restraint in the growth in property lending and in other forms of asset - based finance, such as share margin financing and taxi loans. [UNK] • the third lesson is that increased disclosure and transparency are necessary to reduce market uncertainty and limit the risk of contagion. the disclosure of bad news can be uncomfortable, but it does serve the useful function of putting pressure on management to run their business prudently and to deal quickly with any problems which may arise. hong kong has made considerable progress in recent years in terms of disclosure of information by banks. we intend to build on this during the course of 1998 by recommending new measures such as more disclosure about non - performing loans and more specific guidelines for income recognition by banks. review of the hong kong banking sector 22. we will be building these lessons into our supervisory approach during the course of 1998. more generally, as i have already mentioned, we also have to ensure that our approach keeps up with market developments and takes account of new types of risk that may emerge. for this reason, we have recently commissioned a firm of consultants to carry out a study of the banking sector in hong kong over the next five years. 23 the study has two objectives. the first is to examine the strategic outlook for the banking sector in hong kong during the five - year period. this will include an assessment of the strengths and weaknesses of the banking sector and the opportunities and threats with which it is faced, taking into account the impact of global and local trends and issues. among the issues to be examined will be the costs and benefits of certain features of the current regulatory system ( such as the remaining interest rate rules and the one branch policy ) and the potential impact of changes to these features. i should add however there is no presumption that changes to the current regulatory system should, or will, be made. we are going into this with an open mind. 24. the second objective of the study is to consider the adequacy and effectiveness of the hkma ’ s current approach to banking supervision and to make recommendations for any changes that seem required in the light of the strategic outlook for the banking sector. this would include any changes that needed to be made to the organizational structure of our supervisory function within the hkma and the supervisory policies, guidelines and techniques which we use.