FINANCIAL AND MONETARY AFFAIRS
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. They 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 approach 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. The Basle Committee issued three consultative papers in 1993 on the subjects of netting, market risks and interest rate risk. In 1994, the committee confirmed its proposals on bilateral netting. Having ascertained from the Hong Kong Law Society that Hong Kong law is generally supportive of netting, the HKMA issued a policy paper in February 1995 based on the Basle framework. Since June 30, 1995, after the necessary legislative changes and with safeguards, authorised institutions may use this method of reducing credit risk. The Basle Committee also issued new proposals for the supervision of market risks in 1995. Market risk is defined as the risk of loss in on- and off-balance sheet transactions arising from movements in market prices. It covers transactions relating to foreign exchange, interest rates, equities and commodities. The HKMA is considering how and when a market risk supervisory framework should be implemented in Hong Kong. The local framework will be based on the Basle proposals but will take into account the generally low level of exposure to market risks of local authorised institutions. The latter has been confirmed in a Bank for International Settlements global survey on foreign exchange and other financial derivatives activities, in which the HKMA participated in April 1995.
The Basle Committee continues to develop an agreed common framework for measuring interest rate risk by international supervisors. The HKMA will continue to monitor developments on this issue in the committee and other supervisory authorities. To enable continuous monitoring of interest rate risk by the HKMA, a regular return was introduced in August 1994.
In view of the fast-growing derivatives markets, the HKMA strengthened its supervisory efforts in this area. In early 1995 it conducted a survey of risk man- agement practices of 53 derivatives participants. It also conducted a series of treasury visits to authorised institutions on derivatives activities and will continue to perform this task as part of its regular supervisory routine. These visits were carried out by a newly formed derivatives specialist team.
The HKMA also required all authorised institutions which engage in the trading of derivatives to perform a review of their internal controls and to report their findings to the authority subsequent to the Baring bank crisis. Where weaknesses have been identified, the HKMA has asked institutions concerned to take immediate action to eliminate them. In December 1994, the HKMA issued a guideline to authorised institutions on risk management for derivatives. A further operational guideline is under preparation.
In February 1994, the HKMA wrote to all authorised institutions, setting out further guidelines on property lending. It suggested that institutions whose per- centage share of property-related loans was above the industry average of 40 per cent
73
Page 105Page 106