exposure to the Hong Kong dollar. This caused some tension with the Hong Kong authorities, who see it as not only straying into the local supervision of HSBC Ltd and Hang Seng, but also encroaching on the Hong Kong government's management of the exchange rate. We have agreed with the Hong Kong Commissioner of Banking that while both banks will be set larger limits, in practice they will be expected to work within the internal limits of US$100mn each.
Auditors
Peat Marwick, HSBC's group auditors, will replace Ernst & Young as Midland's auditors with effect from 1 January 1993.
Capital ratios
We originally advised HSBC that we would set the consolidated trigger and target ratios for HSBC Holdings plc at 9.5% and 10% respectively. They accepted this, but requested early review of the ratios. We have concluded that setting these ratios would be somewhat harsh, and would put the group at a serious competitive disadvantage against the other three UK clearers. Furthermore, the group (including Midland) risk asset ratio is comfortably in excess of a target ratio of 10% and, in fact, is stronger than the other clearers. It is considered that as HSBC is the largest UK banking group, the best capitalised of the clearers and is second to Lloyds in profitability terms, a lower trigger is more appropriate. Accordingly, we have informed HSBC that we are setting the consolidated trigger and target ratios for HSBC Holdings plc at 9% and 9.5% respectively, with effect from 1 January 1993.
You should note that the foregoing information is confidential under the Banking Act 1987 and is disclosed to you through the gateway provided for in Section 84 (5) of the Act.
If you have any queries regarding this letter, I should be pleased to answer them.
Yours sincerely
Wüllükkumi
JC W Osborn Manager
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