TNAG-1266-FCO40-1615-Economic-policy-in-Hong-Kong-1983 — Page 26

LAND PRICES IN PARTICULAR, WHICH HAVE BEEN MAJOR REASONS OTHER THAN POSSIBLE MALFEASANCE LEADING TO THE FAILURE OF A FEW REGISTERED DEPOSIT-TAKING COMPANIES, BUT THIS COULD NOT HAVE BEEN FORESEEN

IN APRIL 1981. THE REQUIREMENT UNDER THE THREE-TIER STRUCTURE FOR

DEPOSIT-TAKING COMPANIES TO RUN DOWN ALL SHORT-TERM DEPOSITS BY JUNE THIS YEAR MAY WELL HAVE CONTRIBUTED TO THESE PROBLEMS, BUT I

AM NOT CONVINCED THIS WAS THE CRITICAL FACTOR. I AM, HOWEVER, CERTAIN

THAT HAD NOTHING BEEN DONE TO STOP THE EROSION OF BANK DEPOSITS

THE RESULTING 'CUT THROAT' COMPETITION FOR DEPOSITS WOULD HAVE

CAUSED MUCH GREATER DAMAGE TO THE FINANCIAL SECTOR THAN HAS BEEN

CAUSED BY THE RECENT FAILURE OF A FEW COMPANIES. MOREOVER, SOME OF THE SMALLER BANKS THEMSELVES WOULD HAVE BEEN AT RISK, WHICH IS OF

MUCH GREATER CONSEQUENCE. I AM SURE THAT WHEN THE ADJUSTMENTS ARE

OVER AND THE DUST HAS SETTLED, WE SHALL END UP WITH A SYSTEM WHICH

PROVIDES BOTH BETTER PROTECTION FOR DEPOSITORS AND A SOUNDER

GENERAL STRUCTURE. UNQUOTE

13. QUOTE I AM OF COURSE VERY MUCH CONCERNED BY RECENT EVENTS AND

MY BRANCH OF THE GOVERNMENT IS CONSIDERING HOW AS A RESULT OF

RECENT EXPERIENCES, OUR PRESENT SYSTEM, STRUCTURAL OR SUPERVISORY,

CAN BE IMPROVED. WE SHALL BE LOOKING AT THIS QUESTION CAREFULLY

AND IF INADEQUACIES ARE IDENTIFIED WHICH ARE CAPABLE OF IMPROVEMENT,

THEN, SUBJECT TO THE USUAL CONSULTATIVE PROCESS, CORRECTIVE ACTION

WILL BE TAKEN. BUT IT MUST BE RECOGNISED THAT BUREAUCRATIC INTER-

FERENCE AND CONTROL BEYOND WHAT IS NECESSARY CAN BE DAMAGING TO THE

FINANCIAL SECTOR AND THE ECONOMY AS A WHOLE, AND THAT NO MATTER HOW

STRINGENT CONTROLS ARE, MALFEASANCE AND POOR MANAGEMENT ON THE PART

OF FINANCIAL INSTITUTIONS CAN NEVER TOTALLY BE AVOIDED. UNQUOTE

14. QUOTE MAY I CONCLUDE BY SUMMAR ISING WHAT I HAVE SAID. THE MAIN

POINT I HAVE ATTEMPTED TO MAKE IS THAT, IN THE CIRCUMSTANCES OF

TODAY, THE PROBLEMS WHICH SOME DEPOSIT-TAKING COMPANIES HAVE RECENTLY EXPERIENCED MIGHT HAVE BEEN CONSIDERABLY WORSE HAD IT NOT

BEEN FOR THE INTRODUCTION OF THE THREE-TIER SYSTEM, BECAUSE SMALL

COMPANIES WOULD HAVE FOUND SURVIVAL VERY MUCH MORE DIFFICULT IF THE

BANKS HAD ABANDONED THE INTEREST RATE AGREEMENT, OR IF DEPOSIT-

TAKING COMPANIES HAD BEEN REQUIRED TO COMPLY WITH THAT AGREEMENT.

I HAVE ALSO POINTED OUT THAT IN THE MINDS OF MANY BANKERS, THE RULE WHICH NOW PREVENTS REGISTERED DTC'S FROM TAKING DEPOSITS UP TO 3

MONTHS HAS EXISTED SINCE 1964, AND THAT IT IS NOT, THEREFORE,

SOMETHING NEW. ALTHOUGH SOME WILL CONTEST THIS VIEW IT IS A POINT

WHICH SHOULD NOT BE OVERLOOKED BECAUSE IT MUST HAVE BEEN CLEAR TO EVERYBODY CONCERNED THAT THIS UNCERTAINTY COULD NOT HAVE BEEN

ALLOWED TO CONTINUE INDEFINITELY. UNQUOTE

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CONFIDENTIAL

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