- 5 -
it
still would be to auction quotas periodically, ensuring instant adjustment to the most efficient producers and windfall gains to the Government.
•
•
•
• a
between HKG and the
13. Policy towards Banks. The World Bank thought " somewhat more distant relationship banks would benefit the 'public interest' more. In dealing with the bankds it was necessary to avoid 'ad-hocery', they said. The first stage of an ad-hoc or evolutionary programme to reform the banking sector was completed earlier this year when the Financial Secretary decided to ease the moratorium on new banking licenses slightly so as to allow very large foreign banks to open one office in Hong Kong. Yet even this met strong resistance from the established cartel. There is still no sign of an end to the interest rate cartel, or of large banks being ordered to divest themselves of subsidiaries so as to increase bank competition. The unofficial competition has arisen from 'deposit-taking companies' who are financial intermediaries (none are allowed to call themselves banks) and who now have to satisfy certain liquidity requirements. Regrettably, 'specified liquid assets' (SLA) includes gross foreign short-term deposits so that ratios of SLA to total assets have little meaning since an HK bank may increase this ratio instantly simply by lending $100 m to an overseas subsidiary and then borrowing it back again.
,1
14.
But the most needed reform of all is a Central Bank. One of the reasons for acceding to the established banks' requests for a moratorium on bank licences was a succession of liquidity crises, but even after the moratorium was set up in 1965 there were liquidity crises (in '67 and '73). Indeed, as the World Bank pointed out (para 5.26 of the Report) the prescnt duopoly or cartel was inevitable given the absence of a Central Bank selling domestic liquid assets and with its own reserve money (which could prevent liquidity crises) since only a very large private bank will have big enough assets to withstand large liquidity shocks. For this reason they advocated a radical policy towards the banking sector rather than its gradualist
alternative - ie increased competition between banks is impossible
/in
CONFIDENTIAL: UK EYES A
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