partner no sign of banks taking greater risks since the end of 2002, mortgage claims have recorded annual growth rates of up to 6 %. this is quite substantial compared with the rather moderate trend in real estate prices. it appears that the expansion of mortgage claims has not been driven so much by real estate prices, but by the number of loan requests. consequently, the growing demand for loans is more likely attributable to factors other than the expectation of a speculative boom in real estate prices. the crucial question is the following : is the higher demand for loans due to excessively harsh competition among banks that has led to cheaper credit not reflecting the actual risks incurred? how has the relatively strong growth in mortgage loans impacted on bank risks? to answer this question, we took a closer look at the banks ’ risk behaviour. several indicators led us to believe that banks have hardly engaged in excessive risk taking. while it is true that interest rate margins, i. e. the spreads between mortgage rates and the banks ’ financing costs, had fallen slightly by mid - 2005, other bank expenses declined at the same time. in the final analysis, therefore, the profit margin was virtually constant or even slightly higher. the profit margin corresponds to the difference between the interest rate margin and the total operating expenses expressed in percent of the loan volume and – to reflect expected risks – of total value adjustments and provisions. the banks ’ profit margin thus also serves to cover unexpected risks. given that the profit margin has remained constant or moved slightly higher, the banks ’ risk - taking capacity has not diminished in spite of pressure on interest rate margins. this presupposes, however, that the banks have made realistic value adjustments and provisions. we currently assume that this is the case. moreover, average lending limits for mortgage loans have changed only insignificantly and may be regarded as cautious. for instance, the proportion of low - risk first mortgages – i. e. those mortgages with the lowest lending limit – is over 90 %. the criteria used in extending loans can also be rated as conservative. as a rule, assessments of a debtor ’ s future solvency are based on considerably higher interest rates than the current ones. mortgage debtors should therefore be able to meet their liabilities even if there is a marked increase in the interest rate level. our analysis focuses on system - relevant banks and on different groups of banks. we rely on aggregated data and on a random sampling of banks or groups of banks. problems with

will also be mutually independent. the hong kong monetary authority will be accountable solely to the hong kong government. the people ’ s bank of china will not take the place of the hong kong monetary authority and will not set up any office there. as hong kong and the mainland develop increasingly close economic ties in both trade and investment, close co - operation between the two monetary authorities becomes even more important. the two monetary authorities must, therefore, strengthen further the present sound co - operation of central banking functions, including monetary management, banking supervision and the development of the financial infrastructure. the third principle concerns co - operation in prudential supervision. according to the basic law, the hong kong government will continue to supervise financial institutions in hong kong, including financial institutions from the mainland. supervision will continue to be undertaken in accordance with international rules and practices. notwithstanding different business practices in the mainland and hong kong, we have reached consensus on licensing procedures and supervision of each other ’ s financial institutions. it has been agreed that : financial institutions based in the mainland and hong kong setting up offices in each other ’ s territory shall be approved on the same basis as foreign financial institutions. the mainland offices of hong kong - based financial institutions shall continue to enjoy the same preferential treatment in the mainland as other foreign financial institutions. mainland financial institutions in hong kong shall not enjoy any privileges. they shall abide by the law of hong kong and be regulated by the relevant supervisory authorities in hong kong. this arm ’ s length treatment will certainly help to underscore the implementation of the “ one country, two systems ” principle. the fourth principle is that the people ’ s bank of china will support the currency stability of hong kong. on behalf of the pboc, i have early this year signed a bilateral agreement with the hkma on the repurchase of us treasury paper. we are prepared to offer liquidity support to the hkma for the purpose of stabilising the exchange rate of the hong kong dollar. we also stand ready to use our foreign reserves to support the hong kong dollar, if necessary. however, i must point out that under no circumstances will china draw on or resort to hong kong ’ s exchange fund or other assets in any way and for any reason. i mentioned earlier that the basic law states that the exchange fund shall be managed and controlled by the hong kong government. it is also stated that the financial revenues of the hong kong special administrative region shall be used exclusively for its own purposes.