norman t l chan : symposium on financial stability – opening remarks opening remarks by mr norman t l chan, chief executive of the hong kong monetary authority, at the hkma financial stability symposium, hong kong, 30 may 2013. * * * good morning ladies and gentlemen, 1. welcome to the hkma financial stability symposium. the symposium marks the 20th anniversary of the hkma, which is a very young central banking institution comparing with its peers. it is very timely and appropriate for the hkma to convene this symposium on financial stability because hong kong, like many of our asian neighbours, have learnt from our own bitter experience in the few years after 1997 just how painful and devastating financial crisis can become. so it is clearly our common wish to do what we can to reduce the risks of financial crisis recurring or at least mitigate the damage that it can cause to the financial system and the economy when it occurs. 2. in this connection, it may perhaps be useful to look back and observe how the mainstream thinking on financial stability have changed or evolved since the time when the hkma was set up in 1993. i would list a couple of key issues below : ( i ) there was the belief that financial crises would only occur in the developing economies because they had weak financial institutions and poor regulatory regimes. advanced economies would be immune as they had mature financial institutions and robust regulatory systems. we now know that this is not true : since the eruption of the global financial crisis in 2008 we have witnessed the fact that even the most advanced economies cannot be immune from financial instability. ( ii ) there was the view that as long as price stability was attained, financial stability would not be a problem. we now know severe vulnerabilities in the financial system can build up even when inflation is stable and output volatility is low. ( iii ) while very few people would doubt the need to avoid financial crises, there was no consensus view, not until more recently, on who or which institution should be given the mandate to maintain financial stability. given what we have experienced after the global financial crisis, the common view nowadays is that central banks should take a leading role in maintaining financial stability, given that central banks would, in a financial crisis, typically act as, amongst other things, the lender or liquidity provider of the last resort. ( iv ) the term “ macroprudential policies ” was little known not long ago but has now become the buzzword that everybody in the financial and

interesting point here : when a parent mortgages his child, he is accountable for this brutal and inhumane act. however, when a voter elects politicians who promise continued and unsustainable spending he is just one of many, many voters. the vote is cast in anonymity and the voters have no direct accountability for how they vote and for the consequences of such voting decisions. the voters may also think or hope that, even if the national debts can only be paid back by the next generation, it would be someone else ’ s children, not their own, who will have to shoulder the burden. under the influence of anonymity that cultivates “ collective irresponsibility ”, the temptation of “ spend now and not having to repay ” mind - set can easily overwhelm common sense in favour of populist policies with unsustainable fiscal consequences in the medium to longer run. how to get out of a government debt crisis : painful deleveraging and resolute structural reforms 16. it seems clear enough even to people without training in economics that the solution to a crisis caused by excessive level of government debts is not through borrowing more money and piling up more debts. the solution must be through deleveraging over time in the overly indebted sectors. at the national level, three things must be done at the same time. first, the government must implement a credible fiscal consolidation programme to reduce public spending and increase revenues. second, the government should, within the reduced budget, strive to allocate resources to infrastructural and other productive investments that could facilitate the return of healthy economic growth in the medium to long term. third, the bis central bankers ’ speeches government must pursue structural reforms that would enhance the flexibility and capacity of the labour, product and services markets that would raise the productivity and competitiveness of the economy and its workers. 17. of course, i appreciate that these three things are very hard to implement. however, i don ’ t think there is any short cut or easy way out. the adjustments after any financial crisis triggered by excessive debt are by nature very painful. speaking about pain, let me remind you of the pain that hong kong endured the last time we made the mistake of getting into a big property bubble and excessive leverage in the 1990s. after the bursting of the property bubble in 1997, hong kong ’ s gdp shrank by around 9 % in just over a year. housing prices dropped by 66