XN000022-1994-04-27 — Page 18

WEDNESDAY, APRIL 27, 1994

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I INTEND TO BEGIN MY TREATMENT TO THIS SUBJECT BY BRIEFLY DESCRIBING THE LEGAL POSITION AS WELL AS THE HISTORICAL BACKGROUND OF WHAT ARE COMMONLY KNOWN AS THE "INTEREST RATE RULES" I DO THIS IN THE HOPE OF DISPELLING CERTAIN MISCONCEPTIONS THAT MIGHT BE IN THE MINDS OF SOME MEMBERS. I ALSO THINK IT IS IMPORTANT TO IDENTIFY CLEARLY WHAT IT IS WE ARE TALKING ABOUT.

LEGAL POSITION

IN JANUARY 1981, THE HONG KONG ASSOCIATION OF BANKS ORDINANCE WAS ENACTED TO PROVIDE FOR THE INCORPORATION OF THE HONG KONG ASSOCIATION OF BANKS WHICH ASSUMED THE FUNCTION OF ITS PREDECESSOR, THE EXCHANGE BANKS' ASSOCIATION.

SECTION 12 OF THE ORDINANCE PROVIDES THAT THE COMMITTEE OF THE ASSOCIATION MAY, AFTER CONSULTATION WITH THE FINANCIAL SECRETARY, MAKE CERTAIN RULES RELATING TO THE CONDUCT OF THE BUSINESS OF BANKING. THESE INCLUDE, AMONGST OTHERS, RULES AS TO THE MAXIMUM RATES OF INTEREST, RETURN, DISCOUNT OR OTHER BENEFIT WHICH MAY BE PAID OR GRANTED BY MEMBERS OF THE ASSOCIATION TO SPECIFIED HONG KONG DOLLAR DEPOSITS OF THEIR CUSTOMERS, AND THE IMPOSITION OF DEPOSIT AND INTEREST CHARGES.

PURSUANT TO SUCH PROVISIONS, THE HONG KONG ASSOCIATION OF BANKS ISSUED TO ITS MEMBERS A SET OF RULES, ENTITLED RULES ON "INTEREST RATES AND DEPOSIT CHARGES". THAT PART OF THE RULES WHICH CONCERNS INTEREST RATES APPLIES TO INTEREST RATES PAID BY LICENSED BANKS TO CUSTOMERS ON HONG KONG DOLLAR DEPOSITS OF LESS THAN $500,000 AND WITH A MATURITY OF LESS THAN 15 MONTHS, AND UNDER THE RULES, NO INTEREST SHALL BE PAID ON CURRENT ACCOUNTS; THAT PART OF THE RULES CONCERNING DEPOSIT CHARGES IS MORE READILY UNDERSTOOD AS THE MECHANISM FOR IMPOSING NEGATIVE INTEREST RATES WHICH HAS NOT SINCE ITS INTRODUCTION IN 1988 BEEN INVOKED.

HISTORY

ALTHOUGH LEGISLATIVE BACKING FOR THE RULES DOES NOT SEEM ΤΟ HAVE A LONG HISTORY, THE ORIGINS OF THE RULES THEMSELVES CAN BE TRACED BACK TO THE YEAR 1964 WHEN THEY WERE INTRODUCED AFTER PROTRACTED NEGOTIATIONS UNDER THE AUSPICES OF THE THEN EXCHANGE BANKS' ASSOCIATION. THE BACKGROUND WAS NOT WELL DOCUMENTED, BUT THE PURPOSE OF INSTIGATING THE RULES APPEARS IN REALITY TO HAVE BEEN TO PUT A STOP TO CUT-THROAT COMPETITION IN THE FORM OF AN INTEREST-RATE WAR” WHICH HAD PREVAILED DURING THE EARLY SIXTIES, AND THEREBY TO PROTECT THE SMALLER LOCAL BANKS. IT MAY BE RELEVANT TO TODAY'S DEBATE ΤΟ NOTE

1960'S HAD SEEN THE COLLAPSE OF A NUMBER

THAT THE EARLY BANKS.

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OF

LOCAL

/IN FACT,