XN000022-1995-09-26 — Page 6

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Time deposits of less than $500,000 and with a maturity of less than seven days (including 24-hour call deposits) will remain subject to the IRR.

Very few deposits currently fall within this category, but by leaving it subject to the IRR a "firewall" will be created to serve as a buffer between deregulated time deposits and current and savings accounts.

This should avoid any potentially destabilising migration of deposits and is consistent with the Government's previously stated position that there should be no deregulation of current and savings accounts for the time being.

The Consumer Council has indicated that it accepts the "firewall" concept. There is however some difference of opinion over the thickness of the firewall.

The Consumer Council would have preferred that only deposits below 72 hours should continue to be subject to the IRR. The Government looked very carefully at this option which would have created a new maturity bracket, but considers that seven days is a more natural and logical place at which to stop.

This will leave a thicker firewall, while enabling small depositors to gain access

to market rates of interest at only a small cost in terms of loss of liquidity.

The Government's decision follows a review by HKMA of the first two stages of deregulation. HKMA's review concludes that the banking sector has so far absorbed the effects of deregulation well.

However, it also noted that the more volatile international environment (as demonstrated particularly by the Mexican crisis) and the negative perception of influential international analysts on the impact of further deregulation have reinforced the need for caution.

HKMA will discuss with HKAB when the interest rate cap on 7-day deposits will be lifted.

HKMA's decision to recommend disclosure of balance sheet inner reserves in the banks' 1995 accounts was made following a review which took account of such factors as the market reaction to the disclosure of transfers to inner reserves in the banks' 1994 accounts and the views of market analysts, auditors and the banks themselves.

The review concluded that the existing disclosures in the 1994 accounts had already prepared the way for disclosure of balance sheet inner reserves and that this further step could be safely undertaken. The banks consulted by HKMA raised no objection to making the disclosure in their 1995 accounts.