XN000022-1994-04-27 — Page 19

WEDNESDAY, APRIL 27, 1994

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IN FACT, 1964 WAS A VINTAGE YEAR FOR BANKING REFORM IN HONG KONG. INDEED BEFORE THE 1964 BANKING ORDINANCE, BANKING REGULATION WAS ALMOST NON-EXISTENT. THE PREVIOUS 1948 ORDINANCE PROVIDED ONLY THE VAGUEST DEFINITION OF BANKING, BUT THE 1964 LEGISLATION DRAMATICALLY CHANGED THE SCENE AND LAID THE FOUNDATIONS FOR THE CURRENT SYSTEM BANKING REGULATION. AMONG OTHER THINGS IT ESTABLISHED THE OFFICE THE COMMISSIONER OF BANKING WITH POWERS TO GRANT LICENCES AND ΤΟ INSPECT BANK ACCOUNTS; IT INTRODUCED A MINIMUM CAPITAL REQUIREMENT OF $5 MILLION AND A MINIMUM LIQUIDITY RATIO OF 25%. IT ALSO REQUIRED ALL LOCALLY INCORPORATED BANKS TO PUBLISH THEIR ANNUAL REPORTS.

IT WAS IN THIS ATMOSPHERE OF REGULATORY REFORM THAT GOVERNMENT SANCTIONED THE MAKING OF INTEREST RATE RULES, THEN CALLED THE "INTEREST RATE AGREEMENT", WHICH WERE DESIGNED TO REDUCE EXCESSIVE COMPETITION AMONG BANKS. THE BELIEF OF THE AUTHORITIES AT THE TIME APPEARED TO BE THAT PRICE COMPETITION WAS DAMAGING BANKS' INTEREST RATE MARGINS AND THUS INDUCING THEM TO INVEST IN HIGH YIELD AND HIGH RISK ASSETS.

HOWEVER, OVER THE SUBSEQUENT YEARS THERE HAVE BEEN DOUBTERS WHO CLAIMED THAT, IN REALITY, PRICE CONTROLS IN THE FORM OF THE INTEREST RATE RULES WERE ACTUALLY FORCING BANKS TO PRACTISE NON-PRICE COMPETITION BY OPENING MORE BRANCHES AND OFFERING FREE SERVICES. THIS WOULD INCREASE THE COST OF OPERATIONS AND HENCE LOWER THE PROFIT MARGIN AND WOULD THUS MAKE BANKS INVEST MORE IN HIGH RISK ASSETS. THUS, THE ARGUMENT RAN, PRICE CONTROL COULD BE JUST AS DESTABILISING AS FREE COMPETITION.

THE CONSUMER COUNCIL REPORT

THE DEBATE ON WHETHER THE INTEREST RATE RULES SHOULD REMAIN HAS BEEN FUELLED BY THE PUBLICATION IN FEBRUARY THIS YEAR OF THE REPORT ON THE CONSUMER COUNCIL'S INDUSTRY STUDY ON THE BANKING SECTOR.

THIS REPORT WHICH HAVE BEEN REFERRED TO BY MANY MEMBERS IN THIS DEBATE

REJOICES IN THE TITLE OF "ARE HIONG KONG DEPOSITORS FAIRLY TREATED?". IT RECOMMENDS THAT THE RULES SHOULD BE ABOLISHED BY STAGES OVER THREE YEARS, STARTING WITH ABOLISHING THE INTEREST RATE CAP FOR TIME DEPOSITS IN 1995, GOING ON TO ALLOW BANKS TO PAY INTEREST ON

DEMAND DEPOSITS IN 1996 AND CONCLUDING IN 1997 BY ABOLISHING THE INTEREST RATE CAP FOR SAVING DEPOSITS.

ON ONE SIDE OF THE ARGUMENT IS THE VIEW REPRESENTED BY THE CONSUMER COUNCIL WHICH HAS ARGUED IN ITS REPORT THAT THINK BANKS HAVE PROFITED UNREASONABLY AT THE EXPENSE OF THE CONSUMERS TO THE EXTENT OF OVER HK$5 BILLION PER ANNUM BY VIRTUE OF THE SHELTERED POSITION PROVIDED BY THE RULES. SUCH RENTS, THE REPORT SUGGESTS, REPRESENT ABOUT 0.8% OF THE GDP. THE COUNCIL REFERS TO THIS WINDFALL PROFIT MONOPSONISTIC RENT.

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ON THE OTHER SIDE OF THE ARGUMENT, THE HONG KONG ASSOCIATION OF BANKS CONTENDS THAT THE INTEREST RATE RULES HAVE CREATED A STABLE ENVIRONMENT IN WHICH BANKS SUBSIDISE BANK ING SERVICES FOR MANY, GENERALLY LESS WELL OFF, CONSUMERS TO THE TUNE OF ALMOST $4 BILLION EACH YEAR. THE MASS OF SMALLER DEPOSITORS WOULD BE THE ONES TO LOSE OUT IF THE INTEREST RATE RULES WERE TO BE ABOLISHED; AND THE STABILITY OF THE FINANCIAL SYSTEM WOULD BE ADVERSELY AFFECTED.

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