There are two basic choices: bank lending, probably on a syndicated basis; and the issuance of debt securities backed by the evidence of officers' future entitlement.
The availability of funds from bank lending will depend on the rate of growth of Hong Kong dollar deposits, and the competing demands from other consumers of Hong Kong dollar funds, most notably the infrastructure projects scheduled for completion before and after 1997. Most banks are in the process of assessing the likely demand for Hong Kong dollar funds from the airport Core Programme and associated projects, with a view to assessing the consequences for their lending policies in the two other major areas of demand for Hong Kong dollar funds, mortgage lending and trade finance. With approximately 50% of the deposit base in currencies other than the Hong Kong dollar, and demand for Hong Kong dollar borrowing increasing, the cost of on-balance sheet operations is likely to rise, and the availability of funds likely to be limited.
The biggest problem associated with on-balance sheet lending as a means of funding the scheme is the virtual impossibility of securing fixed interest rates for the required duration. Most commercial lending against sovereign risk is done at a margin over the Hong Kong Interbank Offered Rate (HIBOR). For banks who are reliant on the interbank market for their funding, it would only be possible to fix interest rates on lending for amounts and periods matching their interbank deposits.
The dominant banks in the retail deposit market could probably afford to lend at fixed rates for somewhat longer periods than the banks dependent on the interbank market for their funds. This is because the interest rate cartel ensures that there is no costly competition for deposits; and because interest rates on deposits are generally considerably less volatile than interbank rates; and because the majority of the lending funded by retail deposits is prime lending rate based. As a result banks in Hong Kong with retail deposit bases have historically enjoyed healthy margins over cost of funds, which accounts for the generally excellent financial condition of banks in Hong Kong who concentrate on local business. Whilst these margins do (as MAB have observed in commenting on a draft of this report) fluctuate, it remains true that the interest rate cartel has protected the margins of the banks with significant retail deposit bases. All objective observers of the banking industry in Hong Kong agree on