TNAG-1266-FCO40-1615-Economic-policy-in-Hong-Kong-1983 — Page 31

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protection of smaller deposit -taking institutions was the

only reason for this change. The major reason as I have

already said, was to protect the interest rate agreement

itself, as an instrument of monetary policy and this means

ensuring that the agreement has an appropriately wide coverage of short term deposits. While the maintenance of that agreement remains an essential element in the Govern

ment's monetary policy which is still the position, the

Government could not standby and watch it disintegrate.

7.

You may ask how it was possible for the Government

to have allowed a situation to arise which threatened the

effectiveness of the interest rate agreement and the stability

of the monetary system? To answer this question, I must take you back a few years. The starting point, I am afraid, has to be 1965, but I shall be brief.

8.

As you may know, from 1965 to 1972 there was a complete embargo on the issue of new banking licences. The embargo stemmed from a situation of widespread weakness

following a period when banks had been subject to very little supervision and regulation, and was intended to allow a period

for consolidation after the introduction of the 1964 Banking

Ordinance. In October 1972, the embargo was relaxed by the introduction of a "limited moratorium" policy which, however,

still set restrictive criteria for the issue of new licences.

These proved difficult to administer and as a result, the limited.

moratorium was abandoned in 1975 after only one applicant

/had been...