are expecting a significant reduction in the bad debt charge in 2000, which will give a boost to profitability. can we say therefore that life for the local banks is getting back to where it was prior to the crisis? the answer unfortunately has to be “ no ”. we are certainly moving into calmer waters for the banks but there are strong currents, and a few sharp rocks, underneath the surface. the fact is that the competitive environment for banks in hong kong is changing radically as it is for all banks around the world. the current competition in mortgage lending is a case in point. banks are increasingly prepared to lend at margins well below prime. we are getting to the point where it is becoming difficult to earn an economic return from this business once funding costs and other expenses are taken into account. it can be argued that this in part reflects the current excess liquidity in the market and that margins will start to move up again as loan demand and the property market recover in line with the economy. there is some truth in this, but it is difficult to see margins on mortgage business recovering too far. certainly they will not get back to where they were in the boom years before the crisis. there are too many active players in the market, both domestic and foreign, to allow this to happen. what this means is that the banks are going to have to work harder to earn a profit than they have done in the past. they will have to do this at a time when the last stages of interest rate deregulation in hong kong are taking place, starting in the middle of this year and finishing in the middle of 2001. the impact of deregulation cannot be predicted with certainty but the likely impact will be to increase funding costs and thus squeeze the net interest margin. the banks will therefore have to find ways to generate income through new products and through new charging policies. you can expect fees for the various banking services to rise in the deregulated environment. the banks will also be under greater pressure to reduce costs through exploiting new delivery systems, re - engineering their processes and better managing their risks. technology is at the heart of these issues. it is one of the main forces which is driving increased competition and one of the main weapons that the banks are using to respond to competition. how to harness the power of technology, and how to finance the necessary investment, constitute the main strategic challenge facing banks in the world today. this brings me to the main theme of the importance of corporate

however, a number of concerns have also been voiced. i will not go into these in detail, but some of the questions that have been raised are as follows : is the hkma interfering too much in the way in which banks choose to manage themselves? is too much burden being placed upon the board, and upon non - executive directors in particular, in terms of establishing policies and controls? should there be a distinction between listed and non - listed banks? is it right to place more onerous requirements on banks compared with other companies, for example as regards the required number of independent directors? and is it going to be possible to find sufficient independent directors of the right quality? i have answered some of these questions already in this speech. we do believe that banks are different from other companies because they are looking after other people ’ s money. from this point of view, it does not matter whether the bank is listed or non - listed. we also believe that banks are exposed to special risks compared with other companies, and that the board needs to ensure that policies are in place to manage these risks. this is not to say that the board should actually formulate these policies itself. that can be left to management. but the policies should certainly be approved by the board. as to whether we are placing too much burden on the non - executive directors, it should be recognized that being a director of a bank does involve heavy responsibilities. moreover, the criminal sanctions in the banking ordinance apply to all directors, whether they are executive or non - executive. we acknowledge that it may not be an easy task to find non - executive directors with the right skills and degree of independence. we have therefore reconsidered our original recommendations on the number of independent directors to some extent, particularly in relation to restricted licence banks and deposittaking companies, and we are prepared to give institutions which do not already comply more time to do so if necessary. finally, on the complaint that we are perhaps being too intrusive, i would point to our statutory responsibilities under the banking ordinance to ensure that institutions operate with integrity, prudence and competence and that individual directors are fit and proper. concern about corporate governance falls squarely within these responsibilities. however, let me stress that this is not an area where we would want to take a narrow legalistic position. we are anxious to work closely with the banking industry to arrive at a mutually acceptable approach to corporate governance which is appropriate to the particular circumstances of hong kong. we will