david carse : bank consolidation in hong kong speech by mr david carse, deputy chief executive of the hong kong monetary authority, at the jp morgan asian financial institutions strategy conference, hong kong, 1 june 2001. * * * ladies and gentlemen i am grateful to j p morgan for giving me the opportunity to speak to you this morning on the subject of bank consolidation in hong kong. consolidation of the banking industry has been a prominent feature of many of the world's leading financial centres during the last decade. hong kong has been something of an outlier in this respect. my speech today will explain some of the reasons for this and will describe how and why this situation is changing. i will also discuss the attitude of the hong kong monetary authority towards the process of consolidation and what we can do to assist. the g10 report on financial consolidation the trend towards amalgamation among the world's financial institutions prompted the g10 finance ministers and central bank governors in september 1999 to commission a study of financial consolidation and its potential effects. a working party was formed for this purpose, which reported in january of this year. the report is available in both summary and detailed form on the bis website. the g10 report notes that there was a high level of merger and acquisition activity in the 1990s among the financial firms in the 13 countries studied. banks were the main participants in this. the annual number of m & a deals increased threefold during the 1990s and the total value of deals increased almost tenfold in the 13 countries as a whole. moreover, the trend accelerated during the period, with a noticeable increase in activity in the last three years of the decade. as we proceed into the first years of the 21st century, there is little sign of this trend abating. the result has been the creation of a significant number of large and complex banking groups with a global reach. the host of today's conference is a living example of this. we also, of course, have our own homegrown example in the shape of hsbc. motivations for consolidation the motivations behind all this activity are not hard to discern. banks, like other companies, are in business primarily to generate value for their shareholders. m & a, it is commonly held, offers an effective means of achieving this through creating synergies that can increase revenue and reduce cost. in particular, larger banks may be able to achieve revenue gains by filling gaps in their product range and offering customers the opportunity of " one - stop

such as wealth management involve heavy set - up costs that need scale to justify them. such new businesses are also more demanding in terms of managerial skills and smaller banks may find it difficult to attract the right talent. consolidation by means of m & a is not the only way of grappling with these issues, as the bank consortium trust has shown, but it is an option that the local banks in hong kong should keep very much in mind. this should be done as part of an ongoing process of strategic planning that looks ahead to the medium - term rather than simply the next year. the outcome of this process may be that the bank opts to stay as a stand - alone entity. this is a valid commercial decision if taken in a conscious and considered manner rather than by default. however, it should be kept under regular review in the light of the changing financial landscape. against this background, the position of the hkma on bank consolidation can be summarised as follows : - we continue to believe that we cannot, and should not try to, force healthy banks to merge or be acquired against their will. as noted above, this has to be a matter of commercial judgement by the banks concerned. it would be difficult for the hkma to form a better view than market participants of how they should partner themselves, particularly since the success of individual mergers is by no means assured. forced marriages between banks are even more unlikely to be successful. - we will, however, where appropriate, raise the issue of consolidation in meetings with banks'board of directors and management, and will encourage them to make it part of their strategic planning. - we will also do what we can to provide appropriate incentives for banks to think seriously about consolidation, in particular by removing potential barriers to competition such as the last remaining controls on interest rates. - we will not erect artificial barriers to acquisition of local banks by foreign banks, which would be contrary to hong kong's traditional free market ethos and our commitments under wto. - we note the view that is sometimes expressed that it would be desirable for hong kong to retain a core of strong, locally owned banks. this is something that we would support, but it is not something that we can deliver. rather, it would depend on whether the local banks can agree to merge among themselves. - we will do what we can to facilitate individual transactions that are put to us for consideration. this will include giving prompt advice on what is acceptable from a banking regulatory point of