XN000022-1986-10-20 — Page 3

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MONDAY, OCTOBER 20, 1986

MR JACOBS NOTED THAT GOVERNMENT'S POLICY TOWARDS THESE CHANGES REMAINED ONE OF BENEVOLENT NON-INTERVENTION, THAT IS OF INTERVENING AS LITTLE AS POSSIBLE IN THE NATURAL EVOLUTION OF THE MARKETPLACE, AND THEN ONLY IN THE INTERESTS OF THE OVERALL FABRIC OF THE SYSTEM OR TO PROTECT NON-PROFESSIONAL PARTICIPANTS FROM EXPLOITATION.

+WE DO, NEVERTHELESS, HAVE AN INTEREST IN SEEING THAT CHANGES OCCUR BY EVOLUTION AND NOT REVOLUTION, HE SAID.

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+WE SHALL, OF COURSE, TAKE ACCOUNT OF DEVELOPMENTS NOT ONLY LOCALLY BUT IN OVERSEAS MARKETS. WE WILL ALSO CONSIDER, IF NECESSARY IN CONSULTATION WITH THE PRIVATE SECTOR, WHETHER AND WHAT LEGISLATIVE AND FISCAL CHANGES MAY BE NECESSARY TO ENABLE HONG KONG TO CONTINUE TO PROSPER AS AN INTERNATIONAL FINANCIAL CENTRE.+

MR JACOBS SAID THE NEW BANKING LEGISLATION, WHICH CAME INTO EFFECT ON SEPTEMBER 1 THIS YEAR, PROVIDED A MORE EFFECTIVE FRAMEWORK FOR PRUDENTIAL SUPERVISION OF BANKS AND DTC'S ONE THAT TOOK ACCOUNT OF THE CHARACTERISTICS OF INDIVIDUAL INSTITUTIONS AND WAS RESPONSIVE ENOUGH TO NEW MARKET DEVELOPMENTS.

+THE LEGISLATION ALSO SPELLS OUT THE FUNCTIONS OF THE COMMISSIONER, AND REFLECTS A NEW APPROACH TO PRUDENTIAL SUPERVISION ONE THAT IS MORE FLEXIBLE AND RELIES MORE ON THE COMMISSIONER'S DISCRETION AND QUALITATIVE JUDGMENT THAN PREVIOUSLY,+ HE ADDED.

+1T STRENGTHENS HIS ABILITY TO DETECT PROBLEMS AND TAKE REMEDIAL ACTION EARLY.+

MR JACOBS THEN HIGHLIGHTED THE NEW CAPITAL ADEQUACY REQUIREMENT IN THE ORDINANCE INTO EFFECT.

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THE ONLY PART THAT HAD NOT YET COME

+ THE IDEA IS THAT AN AUTHORISED INSTITUTION'S CAPITAL, WHICH IS A BUFFER AGAINST LOSSES, MUST BEAR A MINIMUM RELATIONSHIP TO THE TOTALITY OF THE RISKS THE INSTITUTION IS UNDERTAKING+ HE SAID.

+GENERALLY, THEREFORE, THE BIGGER OR RISKIER AN AUTHORISED INSTITUTION'S BUSINESS, AS MEASURED BY ITS RISK ASSETS, THE HIGHER SHOULD BE ITS CAPITAL LEVEL.+

MR JACOBS EMPHASISED THAT RISK ASSETS INCLUDED CONTINGENT LIABILITIES AND OTHER OFF-BALANCE SHEET ITEMS.

HE SAID THE CAPITAL ADEQUACY RATIO WOULD BE EFFECTIVE ABOUT TWO YEARS TO GIVE TIME FOR INSTITUTIONS TO ADJUST.

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+ INSTITUTIONS HAVE STARTED TO REPORT TO THE COMMISSIONER THEIR CAPITAL ADEQUACY RATIO ACCORDING TO THE ORDINANCE SINCE SEPTEMBER 1,+ HE SAID.

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