joseph yam : banking sector risks and challenges luncheon talk by mr joseph yam, chief executive of the hong kong monetary authority, at the hong kong institute of bankers, hong kong, 16 june 2004. * * * the turnaround thank you for inviting me to talk to you today. it is a pleasure to be here and i am delighted to see such an enthusiastic attendance. i was recently looking over past speeches ( not, let me assure you, with the aim of recycling them ), and i noted that the last time i spoke at one of the institute ’ s lunches was on 24 october 2001. this has prompted me to reflect on how much we have all been through over the past 32 months - both as a financial community and in the larger community. when i last spoke to you the world was just six weeks on from the 9 - 11 attacks. there was a strong sense that we were heading for difficult times, with a worsening global environment, and with deepening deflation, unemployment, a budget deficit, falling asset prices and a rising number of negative equity mortgages within hong kong. conditions were likely to get worse before they got better, i concluded. well, after a period of great difficulty, in which things got considerably worse than i think any of us had imagined, conditions are now at last improving. since around the middle of last year hong kong has been enjoying a strong and broadening recovery. the economy has now regained much of its dynamism. the key economic numbers are providing the confirmation. economic growth has been impressive. the unemployment rate has been coming down, albeit slowly. deflationary pressure has been easing. the external sector has been active and we are running a substantial current account surplus. the residential property market, on which the wealth of many in our community depends, has bottomed out from a falling trend that had lasted for over five years. domestic consumption has been picking up. of more direct interest to us in the hkma, the risks to monetary and banking stability, which had been worrying us for some time, have receded. the very fast dissipation in the number of cases of personal bankruptcy and negative equity mortgages is very welcome indeed. the turnaround in the hong kong economy and, consequently, the improvement in the asset quality of banks, were made possible by the more favourable global economic environment and by measures taken to strengthen economic ties between hong kong and the mainland. indeed, banks in hong kong have also

. in addition to protection against technology - related crime, the it framework of banks also requires business continuity planning ( or bcp ). banks in hong kong made great strides in bcp during the preparations for the onslaught of the y2k bug. although the onslaught never came, we were soon reminded of the importance of bcp by the 9 - 11 attack, which alerted us to the need for robustness in payment, clearing and settlement systems, among other things. then the outbreak of sars last year put the bcp capability of banks in hong kong to a real test. i am pleased to say that the contingency arrangements of banks - whether of a technical or personnel nature - performed very well during that difficult time. nevertheless, the recurrence of disasters and their unpredictable nature should always be a feature of bcp and its continuous review. indeed, the probability of occurrence of these events seems to have increased, along with heightened geo - political tension and the trend of globalisation, not just of trade and markets but also of terrorism and disease. a further area that falls broadly under technology risk comes from outsourcing. continuing pressure on profitability will no doubt result in more banks seeking to outsource their operations to lower - cost centres outside of hong kong. this will in turn give rise to additional operational risks for banks, including the risks of service outage and leakage of confidential customer data. my main observation from recent experience with handling technology risk is that bank management should adopt a more proactive approach towards increasing the overall robustness of the it environment, from both the crime prevention and bcp perspectives. in dealing with these it - related incidents, we noticed the concerns sometimes expressed by bank management about the likelihood of causing unnecessary public panic if these matters were given publicity. many preferred to deal with the problems quietly. the desire to be cautious and to avoid negative publicity is quite understandable. however, we have found that, far from causing panic, our insistence on publicity has been helpful in alerting members of the public of the nature of risks that they are exposed to as bank customers and how they can protect themselves. it enhances public education on the issues at hand and promotes the exercise of a degree of care by bank customers that the situation demands, not just to protect themselves but also to help in protecting the integrity of the system. interestingly, nowadays, we sometimes receive reports of fake web - sites from members of the public even before the banks affected become aware