XN000022-1994-07-26 — Page 5

TUESDAY, JULY 26, 1994

THE GOVERNMENT CONSIDERS IT IMPORTANT, WHILE TRYING ΤΟ ENCOURAGE MORE COMPETITION IN THE MARKET, TO STRIKE A BALANCE BETWEEN THE NEED TO MAINTAIN STABILITY OF THE MONETARY AND BANKING SYSTEMS.

MR CARTLAND SAID EXPERIENCE IN OTHER PARTS OF THE WORLD HAD

RISKS THAT DEREGULATION OF INTEREST RATES CARRIED DOWNSIDE SHOWN

AS INDIVIDUAL BANKS TRIED TO EXPAND OR PROTECT THEIR MARKET SHARE.

DESPITE THE CONSIDERABLE STRENGTHENING OF HONG KONG'S SYSTEM OF BANKING SUPERVISION OVER THE PAST YEARS, NO SYSTEM COULD GUARANTEE THAT BANKS WOULD NOT RUN INTO DIFFICULTIES, PARTICULARLY IN A RAPIDLY CHANGING ENVIRONMENT.

IN RESPECT OF MONETARY STABILITY, THE HKMA CONCLUDED THAT THE INTEREST RATE RULES PLAYED A HELPFUL, THOUGH NOT CRUCIAL, ROLE IN MAINTAINING EXCHANGE RATE STABILITY AND THAT THE POWER TO IMPOSE NEGATIVE INTEREST RATES UNDER THE RULES HAD TO BE RETAINED.

THE HKMA STUDY ALSO ADVISED THAT PRUDENCE WAS CALLED FOR AT A TIME WHEN WORLD FINANCIAL MARKETS WERE UNDERGOING SIGNIFICANT CHANGES.

INTERNATIONAL CAPITAL FLOWS AND FINANCIAL MARKETS HAVE BECOME MUCH MORE VOLATILE AND LARGER IN VOLUME. THE U.S. DOLLAR INTEREST RATES ARE NOW ON AN INCREASING TREND, WHICH MAY DAMPEN GENERALLY THE LEVEL OF ECONOMIC ACTIVITY.

IT

IS THUS ADVISABLE NOT TO ASSUME UNDUE RISK IN THE MONETARY AND BANKING SYSTEMS AS INSTABILITY WOULD UNDERMINE PUBLIC CONFIDENCE.

MR CARTLAND SAID THERE WERE ALSO NO COMPELLING REASONS FOR FULL-SCALE LIBERALISATION OF INTEREST RATES AT THIS TIME.

CONTRARY TO COMMON BELIEF, SMALL DEPOSITORS MIGHT BE WORSE AS BANKS WOULD PROBABLY REACT BY INTRODUCING ADDITIONAL CHARGES TIERED INTEREST RATES IN FAVOUR OF LARGER DEPOSITORS, AS WELL SCALING DOWN ON SERVICES.

OFF

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THE HKMA STUDY ALSO CONCLUDED THAT THE POTENTIAL FOR BANKS EARN EXCESSIVE PROFITS FROM THE INTEREST RATE RULES HAD BEEN ERODED BY BY THE DEVELOPMENT OF SUBSTITUTES FOR DEPOSITS GOVERNED BY THE RULES, THE COSTS

NON-PRICE COMPETITION AND BY A DECLINE IN DEPOSIT MARGINS.

OF

RESPONSE, THE

COMMENTING ON THE PUBLICATION OF THE GOVERNMENT FINANCIAL SECRETARY, SIR HAMISH MACLEOD, SAID THE GOVERNMENT'S ENDORSEMENT OF THE CONSUMER COUNCIL'S PROPOSAL TO ABOLISH THE INTEREST RATE CAP ON TIME DEPOSITS IN 1995 AND TO ENCOURAGE MORE FINANCIAL DISCLOSURE BY BANKS REPRESENTED POSITIVE STEPS FORWARD.

THE HKMA WOULD CONTINUE TO MONITOR THE OPERATION OF THE INTEREST RATE RULES TO ENSURE THAT THEY WOULD NOT BE APPLIED IN A MANNER THAT WOULD STIFLE INNOVATION OR COMPETITION WITHIN PRUDENT BOUNDARIES, SIR HAMISH SAID.

IN RESPECT OF THE LINK BETWEEN THE HONG KONG DOLLAR AND THE U.S. DOLLAR, SIR HAMISH SAID THE LINK WOULD CONTINUE TO BE CRUCIAL TO THE STABILITY AND PROSPERITY OF HONG KONG.

THE HONG KONG GOVERNMENT IS COMMITTED TO MAINTAINING THE LINK WOULD HAVE TO ENSURE THAT THE NECESSARY TOOLS ARE AVAILABLE FOR ACHIEVING THIS OBJECTIVE, HE SAID.

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