tony latter : banking and development address by mr tony latter, deputy chief executive of the hong kong monetary authority, at the 2001 apec economic outlook symposium held in hong kong, 28 june 2001. * * * i should like this morning to address three particular aspects of the broad topic of banking and development. one is the contribution of banking – or the financial sector more generally – to the economy in terms of activity. the second is the role of banks as providers of cross - border finance for development. the third is the implications of the internet revolution for the development of banking itself. contribution of banking to the economy our very distant ancestors survived without money, let alone banks. with the passage of centuries and the growing complexity of barter, physical money emerged as a useful unit of account, a medium of exchange and a store of value. still later, banks emerged as intermediators between, on the one hand, those with holdings of money surplus to immediate need and attracted by the prospect of earning interest, and, on the other, those willing to pay interest in order to be able to accelerate their spending. with the further passage of time various other means of intermediation, such as marketable securities, also developed. a key point here is that banks only emerged because of the evident utility in the service they provided. throughout the world we can now see examples of how banks and other financial institutions have facilitated the funding of the development of the rest of the economy, and how at the same time they have enabled savers to obtain returns on their savings and to allocate desired expenditure efficiently between the present and the future. of course, there have been shortcomings, mistakes and disasters along the way, where market failures have impaired efficiency or where banks have collapsed as a result of poor judgement or of circumstances beyond their reasonable anticipation or control ; but such experiences are found in all areas of economic activity. despite, however, the evident benefit from having an active and efficient financial sector, there have remained people at different times in history who have been sceptical of the intrinsic worth of banking as an economic activity contributing to aggregate welfare. this attitude has often reflected a presumption that activity only has merit if it delivers tangible output – food, clothing, cars, clearly consumable services such as television programmes, and so on. but this belief contradicts the evidence of the contribution which efficient finance makes to the economy, and the necessary role which it plays. even the strictest communist

and the borrower, and the parties should be expected to honour that contract. if it is treated otherwise, then the basis for all future relationships crumbles. but in practice the situation is hugely complicated if there is a syndicate of lenders, giving rise to problems of co - ordination and potential free riding, or if the world bank or imf are involved, which typically expect to be at the front of the queue for repayments. at the end of the day, commercial banks may decide that a degree of debt forgiveness ( possibly disguised as a generous rescheduling ) is advisable as the best means of minimising overall losses and, perhaps, preserving longer - term business opportunities with the country or customer in question. but this should be a commercial decision. if governments wish, for political or humanitarian reasons, to ease further the contractual debt burden of an indebted country, this should be carried forward as a conscious and transparent policy decision, which would surely involve usage of taxpayers'money unless it was reliant on coercion of banks. in practice, there are many developing countries which are effectively cut off from commercial bank finance because of a track record of default, political instability, economic mismanagement, corruption and so on. banks generally need certain minimum assurances, relating to the political climate, the legal system, transparency, corporate governance, etc, over and above the narrower assessment of the servicing capacity of the borrower. fortunately, most economies in the apec fold can be classified as open for bank finance. but there are many other countries in the world which are passed over by the international banking community because of the lack of the basic essential attributes, or because they are simply too poor to afford credit on commercial terms, in which case they become dependent on concessional finance from the international institutions as the only reasonably accessible source of external funding. banks have to abide by prudent standards. regulators, depositors and shareholders all expect as much. most banks would leap at the chance to lend more to assist development, if such lending was assessed to be commercially viable. but as a general rule banks should not be prevailed upon against their better judgement to be providers of economic aid or social services, whether domestically or internationally, unless there is the political consensus that taxpayers are willing to fund them in that role. the internet turning now to the internet, i believe that this has some relevance to the overall theme of this symposium, not so much because of questions