FINANCIAL AND MONETARY AFFAIRS
74
Authority for the prudential supervision of banks, restricted licence banks and deposit-taking companies is vested in the HKMA. This authority is derived from the Banking Ordinance, the provisions of which relate to the supervision of authorised institutions. The ordinance's main objectives are to provide a measure of protection to depositors and to promote the general stability and effective operation of the banking system.
The supervisory approach of the HKMA is based on a policy of 'continuous supervision'. This involves the ongoing monitoring of institutions using a wide variety of techniques which are aimed at detecting any problem at an early stage.
At the core of this approach is the on-site examination of individual institutions. Depending on the risk assessment of the institution concerned, the scope of an examination may range from an investigation of specific areas to a comprehensive review of an institution's operations. On-site examinations provide a valuable opportunity to assess at first hand how an institution is managed and controlled. They are particularly useful for verifying asset quality. However, they are periodic in nature and, to achieve 'continuous supervision', on-site examination is supplemented by ongoing off-site analysis of the financial condition of individual institutions and the assessment of the quality of their management, including the systems for controlling exposures and limiting risk. The scope of off-site analysis varies from regular analysis of statistical returns covering various aspects of the operations of individual institutions to an extensive annual review of their performance and financial position. Off-site reviews may be followed by a prudential interview with senior management. Frequent contacts are also made with individual institutions at various levels of management as specific issues arise.
In the continuous assessment of the performance of individual institutions, close attention is paid to capital, liquidity, earnings, asset quality, loan loss provisioning, concentration of risks, interest rate risk, risk management systems and internal controls.
Discussion with both internal and external auditors is another important aspect of the supervisory process. Annual tripartite discussions are held with institutions and their auditors, normally following the annual audit. Matters discussed typically include the annual audit, adequacy of provisions and compliance with prudential standards.
The HKMA regularly makes use of its powers under the Banking Ordinance to commission reports from auditors on the accuracy of prudential returns and the adequacy of institutions' systems to compile prudential returns. Additionally, the HKMA may commission reports from auditors on the internal control systems of individual institutions.
Given the evolving financial and economic environment, there is an ongoing need for the HKMA to enhance the supervisory process for maintaining the stability of the banking system. To ensure the effectiveness of its supervisory framework, the HKMA is developing a more formalised risk assessment approach and quality assurance programme.
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 this connection, a new capital adequacy framework (new Accord) was proposed by the Basle Committee on