simon topping : basel ii - implications for hong kong speech by mr simon topping, executive director ( banking policy ) of the hong kong monetary authority, at the city university of hong kong / oracle systems hong kong limited “ basel ii : implications for hong kong ” seminar, 5 july, hong kong. * * * i ’ d like to start by thanking the city university and oracle systems for organising today ’ s seminar and for giving me this opportunity to share with you some thoughts on basel ii, and in particular on the implications for hong kong. the process of devising a new capital accord has now been going on for more than four years and it is still another three and a half years until countries start implementing it. it ’ s clear from this timescale that what we are talking about here is a very major project indeed, and one which has important implications for the banking industry. it ’ s very welcome, therefore, to have occasions like this to help spread the word on what it ’ s all about. but why such a big deal? what ’ s so wrong with the existing capital accord? the answer is simply that, in the 15 years since it was introduced, things have moved on. the nature of banks ’ business and the risks they are running have changed dramatically, and the existing accord no longer comes up to scratch - it no longer functions as a mechanism for ensuring that banks hold an amount of capital that is broadly commensurate with the risks they run. in particular, the current broad - brush treatment of credit risk means that the capital requirement in respect of credits of widely varying quality is the same. and though the existing accord was modified a number of years ago to incorporate capital requirements in respect of market risk, it doesn ’ t require banks to hold capital against many other risks they run - for example, operational risk, interest rate risk in the banking book, and business cycle risk. so there are many good reasons why there should be a basel ii to address these weaknesses in the current capital accord. but while this objective of better matching capital requirements to the risk taken is certainly very worthwhile, it ’ s really only part of the story. for the aims of basel ii are somewhat broader than this. basel ii is not about creating some wonderful all - singing all - dancing system of capital requirements to keep the banking supervisors happy. it ’ s not a case of supervisors trying to dictate how banks should manage their business. on the contrary, it ’ s quite

that next year will be a crucial year for the development of offshore rmb business in hong kong. we have made very good progress this year. along this positive trend, and with the number of mainland enterprises eligible for the cross - border rmb trade settlement scheme increased substantially to 67, 000 recently and with the refinements that we are going to introduce, i am confident that the offshore rmb market in hong kong will continue to develop progressively in the coming year, both in terms of the depth and breadth of the market and product development. four hong kong banks have been approved to participate in the mainland ’ s interbank bond market, and the applications by a number of banks are being processed by the mainland authorities. this will provide a channel for the circulation and capital preservation for the rmb funds in hong kong. meanwhile, we have just been informed that hkma ’ s eligibility for investing in the mainland ’ s interbank bond market has been approved by the pboc. we are working closely with the pboc on the implementation arrangements. finally, to further promote the development of the rmb offshore business in hong kong, the hkma is making preparations for overseas roadshows with the financial industry, focusing on locations which have growing trade and investment flows with the mainland. we believe that with our joint efforts, hong kong will be able to play its role as an rmb offshore market to the fullest, thereby promoting and supporting the nation ’ s increasing cross - border trade and investment activities while enhancing and consolidating the status of hong kong as an international financial centre.