CONFIDENTIAL
3
TUESDAY 28 JANUARY
BANKING COMMISSION:
Mr Robert Fell and Department Heads
1. Current problems in the banking sector were the result of the after-effects of the 1979-80 boom. The 1982 Budget had announced tax cuts but had underestimated the effects of US recession. Property speculation had resulted in over-supply and "impossible" land prices (the HK Land deal on Exchange Square being the most extreme example with completely unrealistic rent levels needed). The collapse in prices had affected lending banks and the property-dominated Hang Seng Index (this is less so now, though before 1982 property was needed in a company's portfolio for a listing). At the same time as this collapse, exports were slowing and un- and under- employment becoming significant (unemployment had reached 4.5% compared with the "full" employment for the Territory generally felt to be 3-3.5%).
2.
The slump had affected some international banks more than local ones. Barclays were involved with Eda and Carrian, while the Bank of Tokyo was still disposing of property today. As prices were falling there was effectively no secondary market in property, no collateral could be realised, and banks had been forced to rescue many property companies.
3. The property market was picking up rather slowly at present, but there was no general demand for bank finance. Banks were generally highly liquid, with "money coming out of their ears". Recovery from a very weak position had continued extremely slowly: 1983 had been "miserable" and 1984 "worse". 1985 figures would probably show poor profitability for the smaller, locally-incorporated banks (though not of course the Hong Kong and the Hang Seng).
4. There had also been management faults in the smaller banks, with unwise concentrations of lending both geographically (particularly to Malaysia and Indonesia) and to particular company groups. Fraud had taken place as a means of attempting to cover up difficulties, and had come to light in 1985. After evidence of fraud in two DTCs, the OTB case in May-June had led to a flight to quality-inducing problems for certain banks. A general tightening of supervision and also of auditing standards had shown up problems.
5.
The Commission was currently acting as a merchant bank/broking service in its "nursing" of the four institutions in difficulty: Wing On, F E Bank, Ka Wah and Union. They were being helped to rebuild their portfolios with the aim of eventual merger or sale.
6. The Commission itself is being reorganised with staff increases for its role which will follow the introduction of the new banking legislation (which will be published after the Budget). The new Laws will make clearer the definition and interpretation of the powers of the Banking Commission. Supervision over banks will be
CONFIDENTIAL
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