ENG-2002 — Page 114

FINANCIAL AND MONETARY AFFAIRS

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The HKMA's supervisory approach is based on a policy of 'continuous supervision' through a combination of on-site examinations, off-site reviews, prudential meetings, cooperation with external auditors and meetings with boards of directors. Since 2000, the HKMA has been using a risk-based supervisory framework for all Als. This approach puts emphasis on evaluation of the quality of risk management practices. and internal controls in respect of various types of risks faced by AIS. On-site examinations are typically limited to areas of highest risk at AIs.

On the international front, the HKMA continues to promote cooperation among central banks in the region, principally through the Executives' Meeting of East Asia- Pacific Central Banks (EMEAP), whose activities cover supervisory liaison and cooperation, development of financial markets and infrastructure, and various areas of central bank operations. The HKMA currently chairs the EMEAP Working Group on Financial Markets, and also the South-East Asia, New Zealand and Australia Group of Central Bank Governors' Forum of Banking Supervisors. To facilitate supervisory training in the region, the HKMA is active in organising seminars for regional banking supervisors in collaboration with the BIS Financial Stability Institute. In addition, Hong Kong is a member of the Financial Action Task Force (FATF), an inter-governmental body with the objective of developing and promoting legal, law enforcement and financial regulation policies to combat money laundering. Hong Kong served as President of the FATF for the period from July 2001 to June 2002.

Recent Developments

The Banking (Amendment) Ordinance 2002, together with the Securities and Futures Ordinance, was enacted in March 2002. Scheduled to commence operation on April 1, 2003, the new ordinances lay down the legal framework for, inter alia, upholding a level playing field between banks and non-bank intermediaries in the securities market. Banks will no longer enjoy 'exempt' status as in the current regime. While the HKMA will remain their front-line supervisor, banks will have to be registered with the SFC in respect of their securities related activities and subject to regulatory standards as well as disciplinary actions equivalent to those applicable to other securities intermediaries.

The HKMA continued to implement the policy initiatives contained in the reform programme announced in 1999 in response to the Banking Sector Consultancy Study. Having secured the approval in principle of the Executive Council on the establishment of a Deposit Protection Scheme in Hong Kong, the HKMA released a consultation paper on the detailed design features of the proposed scheme in April. The Administration is drafting a new piece of legislation to put the scheme into effect. It is envisaged that a bill will be introduced into the Legislative Council in 2003.

The Working Group convened by the HKMA to study the implementation of a Commercial Credit Reference Agency (CCRA) recommended a CCRA scheme targeting at small and medium enterprises (SMEs) based on voluntary participation by AIS. The CCRA would help enhance banks' credit risk management and improve SMEs' access to bank funding as more credit information about them would become available. Good progress was made on the design features of the CCRA during the year.

The HKMA has also been promoting consumer data sharing arrangements among banks. At present, data sharing is limited to mainly negative data (i.e. default data)