ENG-1995 — Page 106

FINANCIAL AND MONETARY AFFAIRS

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should consider stabilising or, if necessary, reducing their percentages. However the industry average of 40 per cent was to be regarded as a benchmark rather than an upper limit, as clarified in a subsequent letter issued to the banks in September 1995. It is accepted that some institutions (particularly those with large residential mortgage portfolios) may have percentages greater than 40 per cent. However, such institutions are generally expected to exercise additional restraint and caution in expanding their property lending. In the same letter, the HKMA also restated its continued support of the '70 per cent ceiling' in respect of the loan-to-valuation ratio. Further to the disclosure package issued in 1994, the HKMA, SEHK and SFC further issued recommendations for disclosure in the 1995 accounts of authorised institutions in December 1994 (Phase I) and in August 1995 (Phase II). The Phase I recommendations covered relatively straightforward disclosure items, such as movements in bad and doubtful debt provisions, analysis between debt and equity securities, maturity profile of investment securities, liquidity ratio and capital adequacy ratio. Phase II covered more complicated items, such as off-balance-sheet exposures, segmental analysis and information on the quality of loan assets. After a review of the disclosure of balance sheet inner reserves in mid-1995, the HKMA recommended that banks disclose their level of inner reserves in their 1995 accounts.

In October 1995, the HKMA and the SFC signed a Memorandum of Under- standing (MOU) aimed at strengthening co-operation between the two authorities. It sets out the framework for co-ordination of supervision of financial institutions or groups in which both authorities have an interest. The authorities have agreed to use their best endeavours to ensure that there will be no gaps in regulation and to minimise unnecessary duplication of effort in their supervision.

The MOU provides in broad terms for: (a) the appointment of a co-ordinator for each institution or financial group in which both authorities have an interest for the purpose of establishing regular exchange of prudential information relevant to an institution's financial position, the fitness and properness of its management and other supervisory matters; and (b) consultation on staff training, issuance of guidelines, and formulation of policy in areas covering securities, futures, fund management and leveraged foreign exchange trading as they affect authorised institutions.

The HKMA and the SFC have agreed to meet every six months to exchange information on financial institutions under dual supervision. They will meet every two months to discuss current and general policy issues. Ad hoc meetings will be arranged to deal with specific supervisory concerns. In particular, each party has agreed to inform the other before taking any disciplinary or regulatory action in relation to an institution in which both have an interest.

Hong Kong is a member of the Financial Action Task Force, an organisation with a mandate to encourage international efforts in the fight against drug money- laundering. To help combat money-laundering, a guideline on the prevention of the criminal use of the banking system for the purposes of money-laundering was issued in 1989 by the then Commissioner of Banking.

The HKMA will revise the guideline to take into account recent legislative amendments. The Organised and Serious Crimes Ordinance, which was enacted in October 1994, has extended the money-laundering offence to other indictable offences. In addition, the enactment of amendment legislation in August 1995 has