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Wednesday, December 13, 1972
The Two Guarantee Agreements (S.G.A. & E.F.G.S.)
Our Sterling Guarantee Agreement with the British Government
includes provision whereby part of the banking system's sterling reserves are
counted as official reserves for the purposes of the guarantee. The banking
system's sterling assets differ in important respects from the Government's,
both as to the purpose for which they are held and the form in which they
are invested. They are held by a large number of banks, some large and some
small, they fluctuate widely, and they must at all times be available to meet
the banks' obligations, a large part of which are in the form of Hong Kong
dollar liabilities. It was not easy to devise a system of bringing these
funds within the protection of the Sterling Guarantee Agreement while retaining
their essential purpose and character. The solution adopted was the Exchange
Fund Guarantee Scheme whereby the Exchange Fund entered into a series of
guarantee agreements with the banks which wished to participate. (To limit
the cost of this scheme to the Exchange Fund those banks which did choose to
join were required at all times to keep a substantial proportion of their
external funds within the scheme). The operation of the scheme, coupled with
Exchange Control restrictions on the Authorized Banks, meant that a very high
proportion of the banks' external assets, which were steadily increasing anyway,
came to be covered over the last four years.
I should like to emphasize here the main differences between the
Sterling Guarantee Agreement with the British Government and the Exchange Fund
Guarantee Scheme with the banks. Under the Sterling Guarantee Agreement the
British Government guarantees without charge the U.S. dollar value of 90% of the
/eligible
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