at promoting the safety and soundness of the banking system. one aspect of this is already in place in the form of a policy statement issued by the hkma in june of last year on its role as lender of last resort to authorised institutions. the major safety and soundness issues however lie ahead. the first is whether we should introduce a commercial credit reference agency in hong kong which would gather and collate information from participating institutions about the indebtedness and credit record of their corporate borrowers. this would enable lenders to obtain a more complete picture of the financial position of their customers, and thus improve their credit assessment and perhaps make them willing to lend. that is the theory, which seems to be supported by both academic research and the experience of overseas countries. we are currently nearing the end of a consultation period and will consider the way forward in the light of the comments received. as this consultation ends, we are about to embark on another that may be more contentious. i am referring to the possible enhancement of the deposit protection arrangements in hong kong. in their consultancy study, kpmg / barents identified this as an important issue as the banking sector becomes more competitive and the level of risk possibly increases. they also considered that the current arrangements, which give priority to small depositors, did not appear to have sufficiently raised the crisis of confidence threshold to avoid bank runs. they therefore recommended that the issue of deposit protection should be looked at again. this we have done in the form of a new consultancy study by arthur andersen that was completed in july of this year. this has looked at various options for deposit protection, including maintenance of the status quo at one extreme and the introduction of an explicit scheme for deposit insurance at the other. such schemes are increasingly being introduced around the world and are advocated by a number of international standard setting bodies. the drawbacks of deposit insurance are however well known, including the risk of increased systemic instability due to moral hazard. the costs of such a scheme would also need to be carefully considered. this is a controversial issue that will need to be fully debated. subject to views of exco, it is our intention to undertake a consultation on the various options for deposit protection at the beginning of october. if it is eventually decided to introduce one of these options, further consultation would then be required on the detailed arrangements. risk - based supervision of course, the best thing would be for the safety net not to be actually used. in other words, we should

the rtgs interbank payment system. the detailed legal arrangements were finalised in may of this year and a formal invitation to join the system was issued to those rlbs with a clear business need to do so. • finally, at the beginning of july of this year, we embarked on the first phase of deregulation of the remaining interest rate rules. this involved removal of the interest rate cap on time deposits with a maturity of less than 7 days. following this, all time deposits are now completely deregulated. what has been the reaction to these changes? the answer is that not much has happened so far. despite the fears of some of the local banks that they would have to cope with a flood of new foreign bank branches, no foreign banks have as yet taken the opportunity to establish additional branches. of course, many foreign banks are engaged in wholesale, corporate or private banking business in hong kong and do not require an extensive branch network. moreover, a number of banks are still recovering from the asian crisis or are in the process of merging, and are not in an expansion mode at present. as mentioned previously, however, there are some foreign banks that are enthusiastic about building up their presence in hong kong. but perhaps for these, the organic route of establishing new branches, and having these limited to three, is too slow and restrictive. acquisition of an existing operation is likely to be more attractive for such banks. we have already said that we will review the impact of the three building condition in the first quarter of 2001. if it appears that it is serving little useful purpose - because there is not in any case a huge demand on the part of foreign banks for additional branches - we may simply dispense with the condition altogether. similarly, no rlb has yet applied to join the rtgs system. it is however early days for this, and we are aware that some of the more active rlbs are considering whether to apply. they will need to weigh the costs and benefits of direct membership compared with the existing practice of using a settlement bank. the important point is that the rlbs are now in a position to make that choice based on their own business needs. if the rlbs feel that there are any remaining impediments to their joining the system we would be pleased to hear from them. interest rate deregulation the first phase of interest deregulation also produced a muted response. this is not unexpected nor is it unwelcome