SUCH CLAIMS, THIS HAS NOT BEEN A CRITICAL FACTOR. INDEED, IN MOST CASES THE DIFFICULTIES ORIGINATED FROM BADLY PERFORMING ASSETS, AND EVENTS WOULD SCARCELY HAVE BEEN LESS DRAMATIC HAD THE COMPANIES. IN QUESTION BEEN MORE HEAVILY DEPENDENT UPON SHORT-TERM DEPOSITS FROM THE PUBLIC THAN THEY IN FACT WERE.
(C) PRUDENTIAL SUPERVISON
4. THERE HAVE BEEN CRITICISMS OF THE SYSTEM OF PRUDENTIAL SUPER- VISION BY THE GOVERNMENT. CRITICS CLAIM THAT HAD THERE BEEN CLOSER AND STRICTER CONTROL OF THE OPERATIONS OF THESE DEPOSIT-TAKING COMPANIES, THEY WOULD NOT HAVE COLLAPSED. IT WOULD OF COURSE BE TOO COMPLACENT TO SAY THAT THERE ARE NO INADEQUACIES IN THE SYSTEM OF PRUDENTIAL SUPERVISION. INDEED, THE MONETARY AFFAIRS BRANCH IS CONSIDERING HOW AS A RESULT OF RECENT EXPERIENCES THE PRESENT SYSTEM, STRUCTURAL OR SUPERVISORY, CAN BE IMPROVED. BUT IT MUST BE RECOGNIZED THAT BUREAUCRATIC INTERFERENCE AND CONTROL BEYOND WHAT IS CLEARLY 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.
(D) CRIMINAL PROCEEDINGS
5. A NUMBER OF OBSERVERS HAVE SUGGESTED THAT IN SOME OF THE DTC COLLAPSES OFFENCES MUST HAVE BEEN INVOLVED - FROM TECHNICAL BREACHES OF THE ORDINANCE TO FRAUD - AND THE GOVERNMENT IS CRITICISED FOR INACTION. SOME ARRESTS HAVE, IN FACT, NOW BEEN MADE, AND FURTHER MOVES SHOULD NOT BE RULED OUT. THE PACE OF PROGRESS REFLECTS THE COMPLEXITIES OF THE CASES, AND THE GAP BETWEEN POPULAR SUPPOSITION AND ADMISSIBLE EVIDENCE.
(E) THE THREE-TIER SYSTEM
6. THE THREE-TIER SYSTEM WAS INTRODUCED IN 1981 AND MANY OF ITS CRITICS HAVE FORGOTTEN WHY IT WAS INTRODUCED. THERE WERE TWO MAIN REASONS. THE FIRST AND VERY IMPORTANT REASON WAS TO HELP TO ENSURE THE MAINTENANCE OF THE INTEREST RATE AGREEMENT (AMONGST THE BANKS) AS AN INSTRUMENT OF MONETARY POLICY. THE SECOND INTER-REALTED REASON WAS TO PROTECT THE SMALLER DEPOSIT-TAKING INSTITUTIONS FROM CUT THROAT COMPETITION.
7. AT THE TIME THE THREE-TIER SYSTEM WAS SET UP, THE MAJOR BANKS HAD EXPERIENCED A FAIRLY LARGE SCALE EROSION OF THEIR BUSINESS. FROM END-DECEMBER 1979 TO END-MARCH 1981, FOR EXAMPLE, THE BANKS' SHARE OF THE HONG KONG DEPOSIT BASE DECREASED FROM 85 PERCENT OF TOTAL DEPOSITS TO 67 PER CENT. THIS DECLINE HAD TAKEN PLACE BECAUSE THE DEPOSIT-TAKING COMPANIES WERE NOT SUBJECT TO THE LIMITS IMPOSED BY THE INTEREST RATE AGREEMENT, AND THEY WERE, THEREFORE, ABLE TO ATTRACT DEPOSITS AWAY FROM THE BANKS BY OFFERING HIGHER INTEREST RATES. HAD THE THREE-TIER SYSTEM NOT BEEN INTRODUCED, THERE WOULD HAVE BEEN A BREAK DOWN OF THE INTEREST RATE AGREEMENT AND A COM-
PETITIVE ASSAULT BY THE BANKS ON DEPOSIT-TAKING COMPANIES. ONLY
THE VERY STRONG WOULD HAVE SURVIVED THIS ASSAULT. THE INTEREST
CONFIDENTIAL
/RATE
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