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"The publication of balance sheet inner reserves is a further step in improving the transparency of the Hong Kong banking system," said the Deputy Chief Executive of the HKMA, Mr David Carse.
"However, the size and significance of inner reserves should be put in perspective. Transfers to inner reserves in the profit and loss account have already been disclosed in the 1994 accounts. The accumulated total of inner reserves on the balance sheet is a historical legacy which does not relate to the current earning power of the banks and which forms only part of their capital base.
"In considering the capital strength of a bank, it is more important to look at the total size of its capital base (including published shareholders' funds) and its relationship to the amount of risk on the balance sheet. This is summed up in the Capital Adequacy Ratio, as recommended by the Basle Committee on Banking Supervision, which has been adopted in Hong Kong since the end of 1989. Inner reserves are already included in the calculation of the Capital Adequacy Ratio."
The policy on inner reserves and the size of these reserves varies widely among banks in Hong Kong. Based on the 1994 accounts, the majority of the 31 local banks (including listed and non-listed) either do not maintain inner reserves at all or have inner reserves which amount to less than 10 per cent of published shareholders' funds (excluding inner reserves).
Some banks do have inner reserves which are significantly higher than 10 per cent of shareholders' funds. But in general, inner reserves are not a major element in the capital base of most banks in Hong Kong.
The Capital Adequacy Ratios of banks in Hong Kong also vary depending on such factors as past dividend policy and the commercial choice of individual banks. However, the Capital Adequacy Ratios of all the banks fully comply with the HKMA's supervisory requirements and are well above the 8% minimum ratio recommended by the Basle Committee. Banks will disclose their Capital Adequacy Ratios in their 1995
accounts.
It should be noted that prior to 1994 some banks also maintained inner reserves which arose from property revaluations. Property revaluation reserves were separately disclosed in the 1994 accounts. The inner reserves to be disclosed in the 1995 accounts, thus reflect past transfers from the profit and loss account and not property revaluations.
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