mr yam presents the 1998 hong kong monetary authority ’ s annual report speech by the chief executive of the hong kong monetary authority, mr joseph yam, on the occasion of the presentation of the 1998 hkma annual report before the legislative council financial affairs panel in hong kong on 3 may 1999. introduction mr chairman, honourable members, i am most grateful to you for giving me this opportunity to speak to you on the occasion of the publication of the hkma ’ s annual report for 1998. the report is tabled at this meeting of the financial affairs panel ; it is also being distributed to all members of the legislative council this morning. this report covers the full range of the hkma ’ s work for the calendar year 1998, in addition to giving an assessment of the economic and banking environment for the year. i have no need to remind members that 1998 was, to put it mildly, an eventful year. the report sets out the many problems and challenges that the hkma has had to grapple with during the course of the year, and explains what actions and initiatives the hkma has been taking to address them. you are all familiar with these issues, and you have the details before you. so i do not wish to take up too much time with a long description. my main focus in this presentation will be on the challenges for the hkma in the coming year, particularly in the light of current economic trends. before i do that, however, i should like just to highlight the challenges and achievements of the past year, and to touch on an issue that i know is of concern to members : the question of accountability and transparency. the year in review nineteen - ninety - eight was an extremely tough year for hong kong. the asian financial crisis, and eruptions in other parts of the world, brought continuing instability. the effects on hong kong ’ s open and outward - looking economy were severe. gdp declined by 5. 1 %, the sharpest decline shown in gdp statistics dating back to 1961. the unemployment rate more than doubled, to 5. 7 % at the end of the year : it has, since then, increased still further. property and share prices plummeted, though they have since regained some of their lost value. the strains and uncertainties of recession have penetrated into every home and every business. the distress has been all the more acutely felt because the recession appeared with dramatic suddenness after many years of vigorous and uninterrupted growth. hong kong

bank supervision. why that was so remains a question of interest. secondly, on the assumption that most of these regulatory changes go ahead, one effect will presumably be to make the process of financial intermediation more costly. the intention, after all, is that lenders will operate with more capital against the risks they are taking. but capital is not free ; shareholders have to be induced to supply it, and it will have to be paid for. high - quality liquid assets typically carry lower yields too, so mandating higher liquidity will have some ( modest ) cost as well. admittedly it can be argued that shareholders of financial institutions will have a less risky investment and so should be prepared to accept lower returns. but customers of financial institutions – depositors and borrowers – will also pay via higher spreads between what lenders pay for funds and what they charge for loans. that is, they will pay more ex ante to use a safer financial system, as opposed to taxpayers having to pay large costs ex post to re - capitalise a riskier system that runs into trouble. now of course protecting the interests of taxpayers is very important, and there is no doubt that certain types of behaviour need to be backed with much more capital, if not severely curtailed or even stopped altogether. it is appropriate that pricing play a role in achieving that. we should try to ensure, however, that the cost is no more than necessary. the most egregious behaviour was mainly that of 30 to 40 large, globally active banks. they have imposed very large costs on their own banking systems, economies and taxpayers, and on the global economy. but there are thousands of other banks in the world whose risk appetite did not get out of control, that have remained solvent, and that have not needed public capital injections. so it will be sensible to ensure, as far as we can, that the proposed measures act effectively to constrain the worst excesses of the former without unnecessarily shackling the latter. i am personally not persuaded of the intellectual basis of the simple overall leverage ratio. it goes against the whole thrust of the idea that capital should be allocated against economic risk – after all, the basel risk weights are a sophisticated leverage ratio already. i have not seen persuasive evidence that the banks of countries that had a leverage ratio in place have systematically outperformed those that did not. nonetheless, it had already been agreed, before australian officials joined the basel