XN000022-1994-04-27 — Page 22

WEDNESDAY, APRIL 27, 1994

IN

TO

THE EFFECT OF DEREGULATION HAS BEEN COMPARED TO THE BREAKING OF A DAM, UNLEASHING A FLOOD OF PENT-UP CHANGE. IT INDUCES CHANGES IN BEHAVIOUR BY THE PREVIOUSLY REGULATED INSTITUTIONS WHICH MAY BE MORE RAPID AND MORE FAR-REACHING THAN ORIGINALLY ANTICIPATED. PARTICULAR, ELSEWHERE IN OTHER ECONOMIES, DEREGULATION HAS TENDED LEAD TO A NARROWING OF INTEREST MARGINS AS BANKS COMPETE MORE ACTIVELY FOR DEPOSITS AND FACE INROADS TO THEIR BUSINESS FROM OTHER PARTS OF THE FINANCIAL SERVICES INDUSTRY. BANKS HAVE TENDED TO RESPOND TO THE NEW, MORE COMPETITIVE ENVIRONMENT BY INCREASING THE RISKINESS OF THEIR PORTFOLIOS AND BY EXPANDING THEIR BALANCE SHEETS IN BOTH CASES WITH THE OBJECTIVE OF REPAIRING THE DAMAGE TO PROFITS CAUSED BY INCREASED COMPETITION. INCREASED INVOLVEMENT BY BANKS AROUND THE WORLD IN PROPERTY LENDING AND HIGHLY-LEVERAGED TRANSACTIONS DURING THE 1980S ARE ONLY TWO EXAMPLES OF THIS.

THE OVERALL IMPACT OF DEREGULATION AND INCREASED COMPETITION

MAY, OF COURSE, BE TO PRODUCE LEANER AND MORE EFFICIENT BANKING SYSTEMS IN THE LONGER RUN. THAT IS WHAT DEREGULATION IS DESIGNED ΤΟ ACHIEVE. HOWEVER, THE PATH TOWARDS GREATER COMPETITION HAS TENDED ΤΟ BE A BUMPY ONE IN OTHER ECONOMIES; AND THE EXPERIENCE OF THE COUNTRIES CONCERNED DURING THE 1980'S SUGGESTS THAT THE EFFECT OF GREATER COMPETITION HAS BEEN TO PRODUCE GREATER INSTABILITY IN BANKS' EARNINGS AND TO LEAVE THEM LESS WELL PROTECTED AGAINST FLUCTUATIONS IN ECONOMIC ACTIVITY.

NOW OF COURSE IT MAY BE ARGUED THAT THE EXPERIENCE OF OTHER COUNTRIES NEED NOT BE REPEATED IN HONG KONG AND INDEED THAT HAS BEEN ARGUED TONIGHT THAT IT WOULD BE THE JOB OF THE MONETARY AUTHORITY AS BANKING SUPERVISOR TO ENSURE THAT THAT WAS THE CASE. I CAN ASSURE YOU OF COURSE THAT THE HKMA WOULD DO ITS BEST. INDEED A NUMBER OF IMPROVEMENTS TO OUR SUPERVISORY SYSTEM HAVE BEEN MADE IN RECENT YEARS TO ENABLE THE OBJECTIVE OF BANKING STABILITY TO BE ACHIEVED. HOWEVER, I WOULD UTTER A NUMBER OF CAVEATS. FIRSTLY, NO SUPERVISORY SYSTEM CAN

OFFER A 100% GUARANTEE OF SUCCESS, PARTICULARLY AT A TIME OF STRUCTURAL CHANGE. IF SUCH A GUARANTEE WERE TO BE OFFERED, IN THE SENSE THAT NO BANK COULD EVER BE EXPOSED TO THE RISK OF FAILURE, IT WOULD BE NECESSARY TO SET SUCH DEMANDING REGULATORY STANDARDS THAT COMPETITION WOULD BE UNDULY CONSTRAINED.

THERE IS ALSO THE UNDENIABLE FACT THAT THE IMPENDING CHANGE OF SOVEREIGNTY MEANS THAT HONG KONG IS UNDERGOING A PERIOD OF ECONOMIC AND POLITICAL TRANSITION AND THE EFFECT OF CHANGES WHICH COULD HAVE IMPLICATIONS FOR THE STABILITY OF THE FINANCIAL SYSTEM NEEDS то BE CAREFULLY WEIGHED.

THE LAST THREE YEARS HAVE BEEN VERY PROFITABLE ONES FOR THE HONG KONG BANKING SYSTEM. BUT THIS SHOULD NOT LULL US INTO A FALSE SENSE OF COMPLACENCY. WE HOPE THAT THE GOOD YEARS WILL CONTINUE, BUT EXPERIENCE SHOULD TEACH US THAT THIS IS NOT NECESSARILY GOING TO BB THE CASE.

DEVELOPMENTS SO FAR THIS YEAR HAVE SHOWN THAT BANKS ARE OPERATING IN AN ENVIRONMENT OF RISING INTEREST RATES AND HIGHER MARKET RISKS.

/LET ME