TNAG-1266-FCO40-1615-Economic-policy-in-Hong-Kong-1983 — Page 30

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deposits away from the banks by offering higher interest

rates. The banks clearly would not have tolerated in-

definitely a continuing erosion of their deposit base, and

the Association of Banks would have been put under strong

pressure to abandon the agreement or at least substantially

modify it. A number of solutions were suggested. One was

that the banks should indeed be encouraged to abandon the

interest rate agreement to enable them to compete with deposit

taking companies for deposits. Another was that legislation

should be introduced to require deposit-taking companies to

conform with the interest rate agreement. Both of these

suggestions would have caused serious problems for deposit -taking

companies, because either solution would have led to a competitive

assault by the banks. Only the very strong would have survived this

assault.

5.

It was decided after very careful consideration of the

available alternatives that the least painful way to deal with this

problem was through the introduction of what has now become known as the three-tier structure. So just as the interest rate

agreement of July 1964 had its origins in the cut throat competition.

between banks in bidding up rates of interest in the early 60's, the

three-tier system was introduced to obviate the likelihood of a dangerously destabilising situation developing between different groups of institutions in the monetary sector. Moreover, while

banks were controlled, the deposit-taking companies had great

licence.

6.

I do not wish to leave you with the impression that the

/protection of...

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