they may find their customers going elsewhere - for example, to internet - based financial institutions. as we have seen from some recent incidents, the banks in hong kong have been lagging behind in the provision of clear information to their customers about the cost of some financial products such as credit card advances. moreover, there has been recent controversy about the provisions in credit card agreements that entitle the lenders to reclaim from debtors the full legal costs and expenses of recovering overdue debts. in a recent court case, the judge ruled that the relevant provisions were unconscionable and therefore could not be enforced. we have written to authorised institutions to ask them to review their terms and conditions in the light of the court ’ s ruling and to ensure that they are consistent with hong kong law. we have also initiated a review of the code of banking practice with a view to strengthening the provisions on such issues as transparency in the provision of banking services and the proper and responsible use of debt collection agents. these issues are already addressed in the code to some extent, and perhaps if the spirit of the code had been more closely adhered to, some of the recent bad publicity for the banks could have been avoided. however, it is evident that the code needs to be made more specific in some areas, and the issue of how to ensure compliance must also be addressed. the code of banking practice is not part of our reform measures, but i have digressed to talk about it for two reasons. first, as already indicated, it becomes all the more important in a deregulated environment to ensure that there is a fair and balanced relationship between banks and their customers. second, the fact that we are going to have to devote resources to this issue for the rest of this year means that one of our reform measures, namely a review of the current three tier system of authorisation, will be postponed from this year to next. this will also allow us to take into account the results of our forthcoming review of deposit protection arrangements, which may have a bearing on the minimum size of deposits that authorised institutions which are not licensed banks should be allowed to take. safety and soundness of the banking system deposit protection is part of what might be called the safety net arrangements for the banking system. as the name suggests the safety net is there to catch banks that are in trouble or, if not the banks, then at least their depositors. this is part of the other aspect of our reform measures that are aimed

the risk weights of different categories of assets, including off - balance - sheet items and “ level 3 ” assets ( non - traded assets whose fair value is estimated through internal models ). again in this case, de facto harmonization is necessary. furthermore, in order to be fully credible and to be perceived as a confidence - building exercise the comprehensive assessment must be rigorously designed and carried out, with clearly defined and well motivated thresholds for gauging any capital shortfalls. if, as bis central bankers ’ speeches observed earlier, one of the objectives of the banking union is to break the perverse feedback loop between banks and sovereigns, then an essential prerequisite is the presence of adequate backstops against the capital shortfalls that may emerge from the bsa. also, to avoid pro - cyclical effects, clear and extensive communication of the process and its results is necessary. the mistakes of the past in the sequence of the actions taken by different policy makers should not be repeated. … and a perspective on the italian banking system the italian banking system offers a few illuminating examples of the problems and challenges of the comprehensive assessment. in the international comparison italian banks appear to have a high npl ratio and a low coverage ratio ( i. e., the ratio of loan loss provisions to gross non - performing loans ). but it is clear by now that the comparison is vitiated by disparities in accounting and supervisory practices, which must be taken into account in order to obtain a fair assessment. a case in point is the treatment of collateralized loans. some major european banks do not classify fully collateralized loans as npls, while in italy loans are classified on the basis of the borrower ’ s creditworthiness, irrespective of collateral or guarantees. both practices are fully consistent with international accounting standards enforced in europe, but the italian method makes the bank ’ s balance sheet more transparent for investors. if italian banks used the same definition as some foreign banks, their stock of non - performing loans would fall by about a third, decreasing their average npl ratio significantly and raising their coverage ratio ; at the same time, the rise in the npl ratio in the recent years would be less accentuated, reflecting the sharp increase in collateral demanded by italian banks in reaction to the deteriorating economic outlook. let me be clear : i am not suggesting a relaxation of the italian definition of npls – which, by the way, is broadly in line with the one proposed in