FINANCIAL AND MONETARY AFFAIRS
standards and confidence in the institutional framework, but without unnecessary impediments of a bureaucratic or fiscal nature.
The authority for the prudential supervision of banks, restricted licence banks and deposit-taking companies is vested in the HKMA. Its authority is derived from the Banking Ordinance, the provisions of which relate to the supervision of authorised institutions. The main objectives of the ordinance are to provide a measure of protection to depositors and to promote the general stability and effective operation of the banking system.
The HKMA has broadened its approach to supervision, which was previously mainly reliant on on-site examinations. Such examinations are still an integral part of the supervisory process, but are supplemented by off-site reviews and prudential meetings with authorised institutions. Off-site reviews involve the analysis of regular statistical returns, and accounting and other management information supplied by institutions, with a view to assessing their performance and compliance with the Banking Ordinance. Such reviews are followed by prudential interviews with the senior management of the institutions, at which the business, prospects and potential areas of concern of institutions are discussed. This broader approach to supervision enhances the HKMA's ability to identify potential areas of concern, which can be followed up by on-site examinations.
As an international financial centre, Hong Kong follows banking supervisory policies that are in line with international standards, especially those recommended by the Basle Committee on Banking Supervision. In 1992, the Basle Committee issued a set of minimum standards that the G-10 countries have agreed to apply in the supervision of international banking groups and their cross-border establishments. These standards are designed to provide greater assurance that no international bank can operate without being subject to effective consolidated supervision. To ensure compliance with these standards, Hong Kong added them to its bank licensing criteria in September 1992. In the case of a foreign applicant, its home supervisor must have established, or be working to establish, the necessary capabilities to meet the minimum standards. In February 1993, the same requirement was added to the licensing criteria for restricted licence banks and deposit-taking companies. The Basle Committee also issued a paper in 1992 setting out a number of proposals on the supervision of liquidity for consideration by banking supervisors worldwide. In the light of these proposals, the HKMA carried out a review of its own regime on the supervision of liquidity. Following extensive consultation with the banking industry, the HKMA introduced a new regime for the supervision of authorised institutions' liquidity on August 1, 1994. Under the new approach, the adequacy of an institution's liquidity will be assessed having regard to a number of factors, including liquidity ratio, maturity mismatch profile, ability to borrow in the interbank market, intra-group transactions, loan-to-deposit ratio, and diversity and stability of deposit base.
The Basle Committee issued three consultative papers in 1993 on the subjects of netting, market risks and interest rate risk. In 1994, the Basle Committee confirmed its proposals on netting while the supervisory approach to the other two areas of risk is still under review.
The Basle Committee's proposals on netting define the conditions under which banks would be permitted to net, on a bilateral basis, the credit risk arising from trading in off- balance sheet transactions such as swaps. For calculating such credit risk on a net basis,
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