FINANCIAL AND MONETARY AFFAIRS
authorised institutions; and to promote the efficiency, integrity and development of the financial system, particularly payment and settlement arrangements. The HKMA is divided into five departments: Monetary Policy and Markets, Reserves Management, Banking Policy, Banking Supervision, and External.
The HKMA is an integral part of the Hong Kong Special Administrative Region (HKSAR) Government, but can employ staff on terms different from those of the civil service to attract personnel of the appropriate experience and expertise. Its staff and operating costs are charged directly to the Exchange Fund instead of the general
revenue.
The HKMA is accountable to the Financial Secretary, who is advised by the Exchange Fund Advisory Committee on matters relating to the control of the Exchange Fund. The committee's involvement in respect of monetary and investment matters has become much stronger. It functions like a management board, meets monthly and advises the Financial Secretary on, among other things, the HKMA's annual budget.
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's supervisory approach is based on a policy of 'continuous supervision'. This involves monitoring authorised institutions using a wide variety of techniques aimed at detecting any problems at an early stage. Consolidated supervision is exercised by the HKMA on a global basis over institutions which are incorporated in Hong Kong.
Prudential supervision in Hong Kong is carried out mainly through on-site examinations, off-site reviews and prudential meetings. On-site examinations provide the HKMA with the opportunity to assess at first hand how an institution is managed and controlled. They are particularly useful for assessing asset quality and the adequacy of internal controls. 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 their business, prospects and potential areas of concern 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 most recent major supervisory framework introduced by the Basle Committee is its proposal on incorporating market risks into the capital adequacy regime, which was finalised in early 1996. 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 implemented a market risk supervisory framework in Hong Kong with effect from December 31, 1997, which is essentially an extension to the capital
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