do this their customers may go elsewhere. the deposit base is therefore less stable than it was. the banks ’ desire to stay liquid also means that they are more cautious about lending. generally speaking, they will want to lend only if they can raise the deposits to do so, and deposits are growing more slowly. this caution also reflects their perception that credit risks have increased in the current economic environment. of course, the demand for borrowing has also declined as the economy has slowed and the property and stock markets have weakened. but the supply of loanable funds has probably fallen even more, partly because of the decision of some foreign banks to cut back their lending in hong kong. this does not represent a loss of confidence by these banks in hong kong. rather, it reflects the need of some banks to downsize their balance sheets and to concentrate more in the future on profitability rather than volume growth and market share. it also reflects the fact that some banks are wanting to cut back on their asian exposure and hong kong is one of the few markets where it is possible to do so. this will have the benefit, from the local banks ’ point of view, that it will push up lending margins ; and over time this will attract more banks back into the market and encourage them to lend. but the appetite for new lending is likely to remain subdued in the short - term. as already mentioned, the fear of increased bad debts is another factor which is making the banks wary about increasing their credit exposure. the combination of regional difficulties and domestic slowdown makes it inevitable that asset quality will deteriorate this year. in the first quarter of the year there was a noticeable rise in loans overdue for more than 3 months, although as a percentage of total loans the figure for the local banks ( less than 2 % ) is still reasonable by international, let alone, regional standards. as to how much worse the situation will get as we go through the year, it is difficult to say. but we can take comfort from the fact that although loan arrears in the all - important residential mortgage market are creeping up, the amounts involved are still very small in percentage terms ( only around 0. 3 % of the local banks ’ mortgage portfolio at end - march ). even if property prices do fall further, there is a strong incentive for homeowners to continue to service their mortgages. the main problem loans we have seen so far have been in the corporate sector and in trade finance. some companies have

mr. carse reviews the impact of the asian crisis on the hong kong banking sector speech by the deputy chief executive of the hong kong monetary authority, mr. david carse, at the sixth conference on pacific basin business, economics and finance in hong kong on 28 / 5 / 98. i am pleased to have the opportunity to talk to you about the impact of the asian financial crisis on the hong kong banking sector. the asian financial crisis is one year old this month, though this is a birthday that we do not want to celebrate. the crisis can be dated from late may when the thai baht came under severe pressure. a renewed attack in early july, while we were celebrating the success of the handover in hong kong, led to the floating of the baht, which promptly plunged in value. the contagion then spread to neighbouring economies, and although hong kong was for a time immune, it eventually reached us too. explaining the origins and causes of the asian crisis has become a major growth industry and i have no intention of adding to the debate today. suffice to say that one point on which almost all the commentators are agreed is that weakness in banking systems in the region has been one of the main reasons which explains the intensity of the crisis and the speed with which it took hold. in the words of alan greenspan, “ what turns otherwise seemingly minor imbalances into a crisis is an actual or anticipated disruption to the liquidity or solvency of the banking system ”. when banks are already weak, for example because of a high level of non - performing loans, an external shock such as an attack on the currency will further damage confidence in the banking system. banks will lose domestic deposits and will find themselves unable to rollover short - term external borrowing. the resultant capital outflows will put further downward pressure on the exchange rate, force up interest rates and drive down asset prices. the customers to whom banks have lent will get into financial difficulties, further weakening the position of the banks. with their capital and liquidity impaired, the banks are in no position to lend, and this leads to the “ credit - crunch ”, and resultant shrinkage of the real economy that we are seeing in so many countries in the region. the reasons for the banking sector weaknesses are various. lending excesses drove up asset prices and allowed companies to become over - leveraged. poor risk management on the part of the banks themselves was compounded by ineffective banking supervision and lack