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WEDNESDAY, APRIL 16, 1986
+A DEPOSIT INSURANCE SCHEME MIGHT REDUCE THE CHANCE OF BANK FAILURE BY MAKING PANIC RUNS ON BANKS BY SMALL DEPOSITORS LESS LIKELY. IT WOULD ALSO ARGUABLY GIVE MORE OPTIONS TO THE SUPERVISORS TO DEAL WITH A PROBLEM BANK IN CASE IT DOES FAIL,+ SIR JOHN SAID.
+BUT THE NATURE OF BANK LIABILITIES IN A MAJOR FINANCIAL CENTRE LIKE HONG KONG HAS CHANGED, WITH THE GROWTH OF THE INTERBANK MARKET, BOTH LOCAL AND INTERNATIONAL, AND WITH TECHNOLOGICAL INNOVATIONS IN TELE-COMMUNICATIONS. A BANK IS MORE LIKELY TO FAIL FROM A WITHDRAWAL OF CREDIT LINES BY OTHER BANKS THAN FROM THE WITHDRAWAL OF DEPOSITS FROM SMALL DEPOSITORS.
+THIS IS SOMETHING WHICH CONVENTIONAL DEPOSIT INSURANCE CANNOT PREVENT.+
SIR JOHN SAID ANOTHER PRACTICAL DIFFICULTY STEMMED FROM THE FACT THAT THE DISTRIBUTION OF THE DEPOSIT BASE AMONG HONG KONG BANKS WAS +HIGHLY SKEWED+.
THIS MADE IT IMPOSSIBLE TO DRAW UP A CREDIBLE AND PRACTICAL INSURANCE SCHEME WITHOUT BEING GROSSLY UNFAIR TO SOME OF THE BIG BANKS, OR WITHOUT COMMITTING SIZEABLE PUBLIC FUNDS, OR BOTH. THE STRENGTHENING OF PRUDENTIAL SUPERVISION SEEMED TO OFFER A BETTER APPROACH.
THE GOVERNMENT DID ITS PART IN SUPERVISION, TO ESTABLISH THE GROUND RULES AND ENSURE THEY WERE RESPECTED, AND TO ENSURE THAT CONFIDENCE IN THE SYSTEM WAS NOT ERODED. BUT BEYOND THAT, IT IS PRIVATE ENTERPRISE, LOCAL AND INTERNATIONAL, THAT SEEKS THE OPPORTUNITIES THROUGH INNOVATION AND COMPETITION, AND THEN TAKES THE RISKS.+
THE GOVERNMENT'S POLICY WAS THEREFORE ONE OF COMPETITION WITH A FRAMEWORK OF PRUDENCE.
REFERRING TO BANK DEPOSITS, SIR JOHN SAID ABOUT HALF
OF THESE WERE IN LOCAL CURRENCY AND HALF IN FOREIGN CURRENCIES. THE CORRESPONDING RATIO IN LONDON WAS ABOUT 30 PER CENT LOCAL
+ IN SINGAPORE, CURRENCY AND 70 PER CENT FOREIGN CURRENCIES.
IT IS ABOUT 35 PER CENT AND 65 PER CENT.+
SIR JOHN COMMENTED THAT THE RAPID GROWTH OF OUR FOREIGN CURRENCY DEPOSITS WAS LARGELY THE RESULT OF HONG KONG'S INCREASING ATTRACTION AS AN INTERNATIONAL FINANCE CENTRE, IN TURN ATTRACTING FOREIGN DEPOSITS WHICH WERE NORMALLY DENOMINATED IN FOREIGN CURRENCIES,
+ANOTHER FACTOR, HE SAID, +1S THE GREATER SOPHISTICATION OF OUR LOCAL RESIDENTS IN MANAGING THEIR FINANCIAL ASSETS, RESPONDING TO INTEREST RATE DIFFERENTIALS AND THE EXPECTATION OF EXCHANGE RATE GAINS.+
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