mr. carse reviews the impact of the asian crisis on the hong kong banking sector speech by the deputy chief executive of the hong kong monetary authority, mr. david carse, at the sixth conference on pacific basin business, economics and finance in hong kong on 28 / 5 / 98. i am pleased to have the opportunity to talk to you about the impact of the asian financial crisis on the hong kong banking sector. the asian financial crisis is one year old this month, though this is a birthday that we do not want to celebrate. the crisis can be dated from late may when the thai baht came under severe pressure. a renewed attack in early july, while we were celebrating the success of the handover in hong kong, led to the floating of the baht, which promptly plunged in value. the contagion then spread to neighbouring economies, and although hong kong was for a time immune, it eventually reached us too. explaining the origins and causes of the asian crisis has become a major growth industry and i have no intention of adding to the debate today. suffice to say that one point on which almost all the commentators are agreed is that weakness in banking systems in the region has been one of the main reasons which explains the intensity of the crisis and the speed with which it took hold. in the words of alan greenspan, “ what turns otherwise seemingly minor imbalances into a crisis is an actual or anticipated disruption to the liquidity or solvency of the banking system ”. when banks are already weak, for example because of a high level of non - performing loans, an external shock such as an attack on the currency will further damage confidence in the banking system. banks will lose domestic deposits and will find themselves unable to rollover short - term external borrowing. the resultant capital outflows will put further downward pressure on the exchange rate, force up interest rates and drive down asset prices. the customers to whom banks have lent will get into financial difficulties, further weakening the position of the banks. with their capital and liquidity impaired, the banks are in no position to lend, and this leads to the “ credit - crunch ”, and resultant shrinkage of the real economy that we are seeing in so many countries in the region. the reasons for the banking sector weaknesses are various. lending excesses drove up asset prices and allowed companies to become over - leveraged. poor risk management on the part of the banks themselves was compounded by ineffective banking supervision and lack

the currency of a payment obligation should be determined by the law of the country of that currency. this means for example that a payment obligation payable in french francs would become payable in euros after the introduction of the euro because that is the situation that applies under the law of france. however, despite this general principle, concerns have been expressed that parties to contracts might argue that the introduction of the euro represented a fundamental change of circumstances, bringing the contract to an end or requiring its terms to be adjusted. in addition, another feature of the introduction of the euro is that it will replace the ecu at a rate of one for one on 1 january 1999. the ecu is a currency basket but not a currency in its own right. the “ lex monetae ” principle does not apply in this case and therefore the euro will not automatically substitute for the ecu in contracts. it is to remove uncertainty on these points that we have decided to legislate. we believe that this is appropriate for an international financial centre such as hong kong. the financial and legal community in hong kong strongly supports this view. this is just one specific example of how hong kong is affected by the introduction of the euro. there will undoubtedly be more far - reaching effects on our economy and our financial system as the single currency takes root. this is why this seminar is timely and important. i hope that you will find it enjoyable and useful.